The Mulligan company, a manufacturer of electrical parts, is evaluating two mutually exclusive projects A&B. The projects are somewhat riskier than the usual projects the firm undertakes; management uses the subjective approach and decided to apply an adjustment factor of +2% to the cost of capital for both projects.
The companyâ€™s a marginal tax rate is 21%, and cost of capital is 11%, evaluate the following proposals.
Project A is a sixyear project that requires an initial fixed asset investment of $3 million. The fixed asset falls into the sevenyear MACRS class. Based on $20 per unit sale price, the project is estimated to generate $2,050,000 in sales during its first year, with production costs of $950,000. Sales and costs are expected to grow at 3% annually. The project requires a single initial investment in net working capital of $285,000 which is expected to be recovered in six years when the project is terminated. The fixed asset will have a market value of $225,000 at the end of its six years life.
Project B is also a sixyear project that requires an initial fixed asset investment of $1.9 million that falls into the sevenyear MACRS class. The fixed asset will also require an additional $100,000 in shipping and installation. The marketing firm predicts that first year sales related to the project will be 62,500 units, at a price of $16 per unit, and grow at an annual rate of 4%.
Operating costs related to the project are predicted to be 22% of sales. The project will also require an initial net working capital investment of $150,000 which is expected to be recovered at the end of six years. The asset is expected to have a market value of $22,000 at the end of the six years when the project is terminated.
The MACRS tax rates are given below:
Year 
3 
5 
7 
1 
33.33% 
20.00% 
14.29% 
2 
44.44% 
32.00% 
24.49% 
3 
14.81% 
19.20% 
17.49% 
4 
7.41% 
11.52% 
12.49% 
5 
11.52% 
8.92% 

6 
5.76% 
8.92% 

7 
8.92% 

8 
4.46% 
PLEASE SHOW ALL EXCEL FUNCTIONS AND DETAILS.
 Calculate project Aâ€™s cash flows for years 06
 Calculate NPV, IRR and PI for project A
 Calculate project Bâ€™s cash flows for year 06
 Calculate NPV, IRR and PI for project B
 Which project should be accepted if any and why?
 What is the exact NPV profileâ€™s crossover rate (incremental IRR)? And what is the relevance of this rate?