Question
In: Finance
Projects SS and LL have the cash flows shown below. If a 10% cost of capital...
| Projects SS and LL have the cash flows shown below. If a 10% cost of capital is appropriate for both of them, what are their NPVs? | |||||||
| 0 | 1 | 2 | 3 | ||||
| SS | -700 | 500 | 300 | 100 | |||
| LL | -700 | 100 | 300 | 600 | |||
What project or set of projects would be in your capital budget if SS and LL were independent?
Solutions
Expert Solution
Project SS
Net present value is calculated using a financial calculator by inputting the below:
- Press the CF button.
- CF0= -$700. 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 cost of capital 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 $77.61.
Project LL
Net present value is calculated using a financial calculator by inputting the below:
- Press the CF button.
- CF0= -$700. 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 cost of capital 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 $89.63.
If projects SS and LL were independent, both the projects would be in the capital budget since the projects have generated a positive net present value.
In case of any query, kindly comment on the solution.
jeff jeffy answered 6 months agoRelated Solutions
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A.
Year: 0 1 2 3 4 5
Cash
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B.
Year:
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1
2
3
4
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Cash
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C.
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1
2
3
4
5
Cash
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18%
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Project A
Project B
Project C
Project D
Project E
0
($36,000)
($56,000)
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$5,000
$15,000
$5,000
$3,500
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$17,400
$5,800
$40,600
$46,400
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$47,096
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following net cash flows. The cost of capital is 15%. Decide which
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Find the discounted payback period.
YEAR
PROJECT A
PROJECT B
PROJECT C
PROJECT D
0
(10,000)
(15,000)
(20,000)
(30,000)
1
5,000
5,000
10,000
0
2
5000
5,000
10,000
0
3
20,000
5,000
4,000
100,000
4
1,000
10,000
2,000
120,000
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-
5,000
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and not repeatable. The CEO wants to use the IRR criterion, while
the CFO favors the NPV method. You were hired to advise the firm on
the best procedure. If the wrong decision criterion is used, how
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1
2
3
4
CF S
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the CFO favors the NPV method. You were hired to advise the firm on
the best procedure. If the wrong decision criterion is used, how
much potential value would the firm lose? WACC: 6.75% 0 1 2 3 4 CFS
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