Question

 

Consider the cash flow for projects A and B Year: 0, 1, 2, 3, 4, 5

Project A: ($1000), 100, 600, 700, 900, 300

Project B: ($1000), 900, 700, 500, 300, 300

The cost of capital for both projects is 10%

1. Find NPV, IRR and profitability index (PI) of projects A and B.

2. If projects A and B are mutually exclusive, which project would you select

3. Find the crossover rate for projects A and B

Answer 1

Project A				Project B
Year	cash flow	present value of cash flow = cash flow/(1+r)^n r = 10%		Year	cash flow	present value of cash flow = cash flow/(1+r)^n r = 10%
0	-1000			0	-1000
1	100	90.90909		1	900	818.1818
2	600	495.8678		2	700	578.5124
3	700	525.9204		3	500	375.6574
4	900	614.7121		4	300	204.904
5	300	186.2764		5	300	186.2764
sum of present value of cash in flow		1913.686		sum of present value of cash in flow		2163.532
cash outflow		1000		cash outflow		1000
NPV	sum of present value of cash inflow- cash outflow	913.6857		NPV	sum of present value of cash inflow- cash outflow	1163.532
PI	sum of present value of cash inflow /cash outflow	1.913686		PI	sum of present value of cash inflow /cash outflow	2.163532
IRR	Using IRR function in MS Excel =irr(-1000,100,600,700,900,300)	36.18%		IRR	Using IRR function in MS Excel =irr(-1000,900,700,500,300,300)	62.97%
	A	B
NPV	913.6857	1163.532
IRR	36.18%	62.97%
PI	1.913686	2.163532
Project B should be accepted as all technqiues favor Project B
	Project A	Project B	Differencial cash flow
Year	cash flow	cash flow
0	-1000	-1000	0
1	100	900	-800
2	600	700	-100
3	700	500	200
4	900	300	600
5	300	300	0
Cross over rate	Using IRR function in MS excel =irr(0,-800,-100,200,600,0)		-4%