Question

Your division is considering two projects with the following cash flows (in millions):

0

1

2

3

Project A	-$19	$8	$15	$17
Project B	-$17	$11	$8	$6

1. What are the projects' NPVs assuming the WACC is 5%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:    $   million

   Project B:    $   million

   What are the projects' NPVs assuming the WACC is 10%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:  $   million

   Project B:  $   million

   What are the projects' NPVs assuming the WACC is 15%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:  $   million

   Project B:  $   million

2. What are the projects' IRRs assuming the WACC is 5%? Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:   %

   Project B:   %

   What are the projects' IRRs assuming the WACC is 10%? Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:   %

   Project B:   %

   What are the projects' IRRs assuming the WACC is 15%? Do not round intermediate calculations. Round your answer to two decimal places.

   Project A: %

   Project B:   %

Answer 1

Part A:

NPV :
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Project A:

If WACC is 5%:

Year	CF	PVF @0.05	Disc CF
0	$        -19.00	1.0000	$        -19.00
1	$            8.00	0.9524	$            7.62
2	$          15.00	0.9070	$          13.61
3	$          17.00	0.8638	$          14.69
NPV	$          16.91

If WACC is 10%:

Year	CF	PVF @0.1	Disc CF
0	$        -19.00	1.0000	$        -19.00
1	$            8.00	0.9091	$            7.27
2	$          15.00	0.8264	$          12.40
3	$          17.00	0.7513	$          12.77
NPV	$          13.44

If WACC is 15%:

Year	CF	PVF @0.15	Disc CF
0	$        -19.00	1.0000	$        -19.00
1	$            8.00	0.8696	$            6.96
2	$          15.00	0.7561	$          11.34
3	$          17.00	0.6575	$          11.18
NPV	$          10.48

Project B:

If WACC is 5%:

Year	CF	PVF @0.05	Disc CF
0	$        -17.00	1.0000	$        -17.00
1	$          11.00	0.9524	$          10.48
2	$            8.00	0.9070	$            7.26
3	$            6.00	0.8638	$            5.18
NPV	$            5.92

If WACC is 10%:

Year	CF	PVF @0.1	Disc CF
0	$        -17.00	1.0000	$        -17.00
1	$          11.00	0.9091	$          10.00
2	$            8.00	0.8264	$            6.61
3	$            6.00	0.7513	$            4.51
NPV	$            4.12

If WACC is 15%:

Year	CF	PVF @0.15	Disc CF
0	$        -17.00	1.0000	$        -17.00
1	$          11.00	0.8696	$            9.57
2	$            8.00	0.7561	$            6.05
3	$            6.00	0.6575	$            3.95
NPV	$            2.56

Part B:

IRR :
IRR is the Rate at which PV of Cash Inflows are equal to PV of Cash Outflows.
It assumes that intermediary Cfs are reinvested at IRR only.

IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in disc rate ] * 1%

If IRR > Cost of Capital - Project can be accepted
IRR = Cost of Capital - Indifferebce Point - Project will be accepted / Rejected
IRR < Cost of Capital - Project will be rejected

It doesn't depends on WACC. Hence in all cases IRR is same

Project A:

Year	CF	PVF @42%	Disc CF	PVF@43%	Disc CF
0	$ -19.00	1.0000	$ -19.00	1.0000	$ -19.00
1	$      8.00	0.7042	$      5.63	0.6993	$      5.59
2	$   15.00	0.4959	$      7.44	0.4890	$      7.34
3	$   17.00	0.3492	$      5.94	0.3420	$      5.81
NPV	$      0.01		$    -0.26

IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in disc rate ] * 1%

= 42% + [ 0.01 / 0.27 ] * 1 %

= 42% + [ 0.04 * 1% ]

= 42% + 0.04%

= 42.04%

Project B:

Year	CF	PVF @24%	Disc CF	PVF@25%	Disc CF
0	$ -17.00	1.0000	$ -17.00	1.0000	$ -17.00
1	$   11.00	0.8065	$      8.87	0.8000	$      8.80
2	$      8.00	0.6504	$      5.20	0.6400	$      5.12
3	$      6.00	0.5245	$      3.15	0.5120	$      3.07
NPV	$      0.22		$    -0.01

IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in disc rate ] * 1%

= 24% + [ 0.22 / 0.23 ] * 1 %

= 24% + [ 0.97 * 1% ]

= 24% + 0.97%

= 24.97%

Pls do rate, if the answer is correct and comment, if any further assistance is required.