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In: Finance

Your division is considering two investment projects, each of which requires an up-front expenditure of $15...

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: %

Solutions

Expert Solution

Project A
Discount rate 0.05
Year 0 1 2 3
Cash flow stream -15000000 5000000 10000000 20000000
Discounting factor 1 1.05 1.1025 1.157625
Discounted cash flows project -15000000 4761905 9070295 17276752
NPV = Sum of discounted cash flows
NPV Project A = 16108951.52
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Project B
Discount rate 0.05
Year 0 1 2 3
Cash flow stream -15000000 20000000 10000000 6000000
Discounting factor 1 1.05 1.1025 1.157625
Discounted cash flows project -15000000 19047619 9070295 5183026
NPV = Sum of discounted cash flows
NPV Project B = 18300939.42
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Project A
Discount rate 0.1
Year 0 1 2 3
Cash flow stream -15000000 5000000 10000000 20000000
Discounting factor 1 1.1 1.21 1.331
Discounted cash flows project -15000000 4545455 8264463 15026296
NPV = Sum of discounted cash flows
NPV Project A = 12836213.37
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Project B
Discount rate 0.1
Year 0 1 2 3
Cash flow stream -15000000 20000000 10000000 6000000
Discounting factor 1 1.1 1.21 1.331
Discounted cash flows project -15000000 18181818 8264463 4507889
NPV = Sum of discounted cash flows
NPV Project B = 15954169.8
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Project A
IRR is the rate at which NPV =0
IRR 0.439684148
Year 0 1 2 3
Cash flow stream -15000000 5000000 10000000 20000000
Discounting factor 1 1.439684 2.07269 2.98402
Discounted cash flows project -15000000.00 3472984 4824647 6702369
NPV = Sum of discounted cash flows
NPV Project A = 1.78441E-06
Where
Discounting factor = (1 + IRR)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
IRR= 43.97%
Project B
IRR is the rate at which NPV =0
IRR 0.820293922
Year 0.00% 1 2 3
Cash flow stream -15000000 20000000 10000000 6000000
Discounting factor 1 1.820294 3.31347 6.031489
Discounted cash flows project -15000000 10987237 3017984 994779.2
NPV = Sum of discounted cash flows
NPV Project B = 7.9337E-07
Where
Discounting factor = (1 + IRR)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
IRR= 82.03%

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