Question

A company has the following 2 projects: Projects C0 C1 C2 C3 A -36 20 20 20 B -50 25 25 25 Assume that the discount rate is 10%. How much is the difference between the NPV values of these 2 projects (i.e., NPV of Project A minus NPV of Project B)? A) 0.57 B) 1.57 C) 3.67 D) 4.67 E) 13.17

A company uses Internal Rate of Return (IRR) criteria to analyze the following two mutually exclusive projects:     

Project	C0	C1	C2	C3
NorthEast	-1100	1000	350	50
SouthWest	-1100	0	300	1500

   Assume that this company’s opportunity cost of capital (i.e., Hurdle rate for IRR analysis) is 10%. Then,

1. which project should be accepted based on IRR analysis?
2. how much is the IRR of this accepted project?  

    (i)               (ii)

         A)           Project NorthEast          20%

             B) Project SouthWest         19%

         C)           Project SouthWest         30%

             D) Project SouthWest         26%       

    E)    Project NorthEast          24%

Answer 1

Project A

Net present value is calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$36. It is entered with a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 10%.
• •   Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $13.74

Project B

Net present value is calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$50. It is entered with a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 10%.
• •   Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $12.17.

Therefore, the difference between the NPV of the two projects is = $13.74 - $12.17

   = $1.57.

Hence, the answer is option b.

Project Northeast

Internal rate of return is calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$1,100. It is entered with a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 20.46%.

Project Southwest

Internal rate of return is calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$1,100. It is entered with a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 19.08%.

i.Project Northeast should be accepted based on IRR analysis since it has the highest internal rate of return.

ii.The IRR of the accepted project is 20.46% 20%

Hence, the answer is option a.

In case of any query, kindly comment on the solution.