Question

NPV Your division is considering two investment projects, each of which requires an up-front expenditure of $15 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 6,000,000 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: $   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:      %

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Answer 1

a.1.Project A

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$15 million. Indicate the initial cash flow by 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.  

Net present value at 5% cost of capital is $16.11 million.

Project B

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$15 million. Indicate the initial cash flow by 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.  

Net present value at 5% cost of capital is $18.30  million.

a.2.Project A

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$15 million. Indicate the initial cash flow by 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.  

Net present value at 10% cost of capital is $12.84 million.

Project B

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$15 million. Indicate the initial cash flow by 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.  

Net present value at 10% cost of capital is $15.95 million.

a.3.Project A

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$15 million. Indicate the initial cash flow by 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.  

Net present value at 15% cost of capital is $10.06 million.

Project B

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$15 million. Indicate the initial cash flow by 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.  

Net present value at 15% cost of capital is $13.90 million.

b.Project A

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

• Press the CF button.
• CF0= -$15 million. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
• Cash flow for each of the fifteen years 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 the project is 43.97%.

Project B

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

• Press the CF button.
• CF0= -$15 million. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
• Cash flow for each of the fifteen years 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 the project is 82.03%.