Question

In: Finance

Your division is considering two investment projects, each of which requires an up-front expenditure of $23...

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:      %

Solutions

Expert Solution

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.


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