Question

In: Finance

Your division is considering two investment projects, each of which requires an up-front expenditure of $17...

Your division is considering two investment projects, each of which requires an up-front expenditure of $17 million. You estimate that the investments will produce the following net cash flows:

Year Project A Project B
1 $ 5,000,000 $20,000,000
2 10,000,000 10,000,000
3 20,000,000 7,000,000

What are the two projects' net present values, assuming the cost of capital is 5%? 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%? 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%? Round your answers to the nearest dollar.
Project A $ ??
Project B $ ??

What are the two projects' IRRs at these same costs of capital? Round your answers to two decimal places.
Project A ?? %
Project B ?? %

Solutions

Expert Solution

1.Project A

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

  • Press the CF button.
  • CF0= -$17,000,000. 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 $14,108,951.52.

Project B

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

  • Press the CF button.
  • CF0= -$17,000,000. 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 $17,164,777.02.

2.Project A

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

  • Press the CF button.
  • CF0= -$17,000,000. 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 $10,836,213.37.

Project B

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

  • Press the CF button.
  • CF0= -$17,000,000. 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 $14,705,484.60.

4.Project A

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

  • Press the CF button.
  • CF0= -$17,000,000. 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 $8,059,587.41.

Project B

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

  • Press the CF button.
  • CF0= -$17,000,000. 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 $12,555,354.65.

5. Project A

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

  • Press the CF button.
  • CF0= -$17,000,000. 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 36.12%.

Project B

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

  • Press the CF button.
  • CF0= -$17,000,000. 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 67.46%.

In case of any query, kindly comment on the solution


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