ading 1 Heading 2 Title Subtitle Subtle Emphasis Emphasis
Styles Unit VIII Assignment
NPV = -1,363.64
PI = 0.997067449
IRR = 9.68%
NPV = 72,727.27
PI = 1.103896104
IRR = 21.43%
Which is the best choice? Why? Project 2 is the best choice because it has a higher and positive
NPV, higher probability index, higher rate of return than initial project 1.
Which project should be selected and why? If the projects had the same IRR amounts but
different NPV totals, then how would you know which project to select? Explain. Project 2 should
be selected because it has a higher and positive NPV, higher profitability index, and higher rate of
return.
What would happen if both projects had negative NPV totals? Which project would you choose?
What do negative NPVs indicate? Explain.
Should we also use the payback method to assist us in project selection? Why or why not?
Explain.
4. The capital structure for Magellan Corporation is shown below. Currently, flotation costs are 13% of
market value for a new bond issue and $3 per share for preferred stock. The dividends for common stock
were $2.50 last year and have an estimated annual growth rate of 6%. Market prices are $1,020 for
bonds, $20 for preferred stock, and $30 for common stock. Assume a 34% tax rate.
Financing Type % of Future
Financing
Bonds (8%, $1k par, 16 year maturity) 36%
Common equity 45%
Preferred stock (5k shares outstanding, $50 par,
$1.50 dividend) 19%
Total % 100%
Compute the company's WACC. Is this WACC considered reasonable given the assumptions and other
relevant information? Explain.
