In: Finance
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: %
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% | |||