Question

Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for both projects is 9 percent.

  

Year	AZM Mini-SUV			AZF Full-SUV
0	–$	485,000		–$	835,000
1		327,000			357,000
2		194,000			434,000
3		157,000			297,000

  

a.	What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

   

b.	What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

   

c.	What is the IRR for each project? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

   

Answer 1

a.AZM mini-SUV

Payback period=full years until recovery + unrecovered cost at the start of the year/cash flow during the year

                           = 1 year + ($485,000 - $327,000)/$194,000

                          = 1 year + 0.8144

                          = 1.8144 years 1.81 years.

AZF Full-SUV

= 2 years + ($835,000 - $791,000)/ $297,000

= 2 years + 0.1481

= 2.1481 years  2.15 years.

b. AZM mini-SUV

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

• Press the CF button.
• CF0= -$485,000. 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 discount rate of 9%.
• 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 $99,518.73.

AZF Full-SUV

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

• Press the CF button.
• CF0= -$835,000. 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 discount rate of 9%.
• 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 $87,150.55.

c.AZM mini SUV

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

• Press the CF button.
• CF0= -$485,000. 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 21.97%.

AZF Full-SUV

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

• Press the CF button.
• CF0= -$835,000. 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 14.92%.

In case of any query, kindly comment on the solution