Your division within a major multinational company is considering two projects. Its WACC is 10%, and the projects' estimated after-tax cash flows (in millions dollars) are as follows:
0------------1----------------2---------------3-----------------4
Project A -$30 $5 $10 $15 $20
Project B -$30 $20 $10 $8 $6
(a) Calculate the projects' NPVs and IRRs.
(b) If the two projects are independent, which project(s) should be chosen?
(c) If the two projects are mutually exclusive and the WACC is 10%, which project(s) should be chosen?
(d) Plot NPV profiles for the two projects. Identify the projects' IRRs on the graph.
(e) If the WACC was 5%, would this change your recommendation if the projects were mutually exclusive? If the WACC was 15%, would this change your recommendation? Explain your answers.
(f) Calculate the crossover rate. Explain what this rate is and how it affects your choice between mutually exclusive projects.
(g) Is it possible for conflicts to exist between the NPV and IRR when independent projects are being evaluated? Explain your answer.
(h) Why do most academics and financial executives regard the NPV as being the single best criterion and better than the IRR? Why do companies still calculate IRRs?