Question

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: %

Answer 1

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%