Question

Your division is considering two investment projects, each of which requires an up-front expenditure of $23 million. You estimate that the investments will produce the following net cash flows:

Year	Project A		Project B
1	$ 4,000,000		$20,000,000
2	10,000,000		10,000,000
3	20,000,000		8,000,000

1. What are the two projects' net present values, assuming the cost of capital is 5%? Do not round intermediate calculations. Round your answers to the nearest dollar.

   Project A: $  

   Project B: $  

   What are the two projects' net present values, assuming the cost of capital is 10%? Do not round intermediate calculations. Round your answers to the nearest dollar.

   Project A: $  

   Project B: $  

   What are the two projects' net present values, assuming the cost of capital is 15%? Do not round intermediate calculations. Round your answers to the nearest dollar.

   Project A: $  

   Project B: $  

2. What are the two projects' IRRs at these same costs of capital? Do not round intermediate calculations. Round your answers to two decimal places.

   Project A:      %

   Project B:      %

Answer 1

a.i.Project A

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

• Press the CF button.
• CF0= -$23,000,000. 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 5%.
• 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 $7,156,570.57   $7,156,571.

Project B

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

• Press the CF button.
• CF0= -$23,000,000. 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 5%.
• 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 $12,028,614.62    $12,028,615.

a.ii. Project A

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

• Press the CF button.
• CF0= -$23,000,000. 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 $3,927,122.46   $3,927,122.

Project B

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

• Press the CF button.
• CF0= -$23,000,000. 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 $9,456,799.40   $9,456,799.

a.iii. Project A

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

• Press the CF button.
• CF0= -$23,000,000. 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 15%.
• 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 $1,190,022.19     $1,190,022.

Project B

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

• Press the CF button.
• CF0= -$23,000,000. 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 15%.
• 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 $7,212,870.88     $7,212,871.  

b.i.Project A

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

• Press the CF button.
• CF0= -$23,000,000. 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 17.45%.

Project B

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

• Press the CF button.
• CF0= -$23,000,000. 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 37.15%.

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