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Mr tan is considering 2 potential investment projects that have similar capital requirements: Year 0 year...
Mr tan is considering 2 potential investment projects that have similar capital requirements:
| Year 0 | year 1 | year 2 | year 3 | year 4 | |
| project A | 4,000,000 | 1,600,000 | 1,800,000 | 2,000,000 | 2,100,000 |
| Project B | 4,200,000 | 500,000 | 1,700,000 | 1,900,000 | 2,000,000 |
For project A,the company cost of capital is 14%.For project B,assessed as the riskier project of the two.,a risk adjusted cost of capital of 15% is considered appropriate.
1) calculate the NPV of the 2 projects and assess the projects using the investment appraisal technique of Net present Vale.
2)Calculate the IRR of the 2 projects and assess the projects using the investment appraisal technique of Internal rate of return.
3) Is the company cost of capital suitable in the evaluation of projects with different risks? Explain
Solutions
Expert Solution
| 1 | 2 | ||||||
| Year 0 | year 1 | year 2 | year 3 | year 4 | NPV | IRR | |
| project A | -4000000.00 | 1600000.00 | 1800000.00 | 2000000.00 | 2100000.00 | 1381861.94 | 29.17% |
| Project B | -4200000.00 | 500000.00 | 1700000.00 | 1900000.00 | 2000000.00 | -86985.82 | 14.13% |
1: Select Project A since it has higher NPV
2: Select Project A since it has higher IRR.
3: Cost of capital differs given the different risks involved. Higher the risk, higher is the cost involved and lower the returns.
WORKINGS
jeff jeffy answered 2 months agoRelated Solutions
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Mr Tommy Tan is considering two potential investment projects
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Project A (4,000,000) 1,600,000 1,800,000 2,000,000
2,100,000
Project B (4,200,000) 500,000 1,700,000 1,900,000 2,000,000
For Project A, the company cost of capital is assumed to be 14%.
For Project B, assessed as the riskier project of the two, a
risk-adjusted cost of capital of 15% is considered appropriate.
Calculate the IRR of the two (2) projects...
Question 1 Mr Tommy Tan is considering two potential investment projects that have similar capital requirements:...
Question 1 Mr Tommy Tan is considering two
potential investment projects that have similar capital
requirements:
Year
0
Year
1
Year
2
Year
3
Year 4
Project A (4,000,000)
1,600,000
1,800,000
2,000,000
2,100,000
Project B (4,200,000)
500,000
1,700,000
1,900,000 2,000,000
For Project A, the company cost of capital is assumed to be 14%.
For Project B, assessed as the riskier project of the two, a
risk-adjusted cost of capital of 15% is considered appropriate.
(b) Calculate the IRR of...
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PROJECT 2
YEAR
CASHFLOW
CASHFLOW
1
$95,000
$112,000
2
$150,000
$95,000
3
$1,000
$85,000
4
$12,000
$65,000
5
$45,000
$10,000
6
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CASHFLOWS
PROJECT
1
PROJECT 2
YEAR
CASHFLOW
CASHFLOW
1
$95,000
$112,000
2
$150,000
$95,000
3
$1,000
$85,000
4
$12,000
$65,000
5
$45,000
$10,000
6
$198,000
$15,000
BOTH PROJECTS HAVE A COST OF $300,000. THE COST OF CAPITAL IS
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2 POTENTIAL CAPITAL PROJECTS HAVE THE FOLLOWING ESTIMATED CASHFLOWS
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PROJECT
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PROJECT 2
YEAR
CASHFLOW
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$95,000
$112,000
2
$150,000
$95,000
3
$1,000
$85,000
4
$12,000
$65,000
5
$45,000
$10,000
6
$198,000
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2
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3 $10,000 $85,000
4 $12,000 $65,000
5 $45,000 $10,000
6 $198,000 $
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$14,400
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