Question

In: Finance

ear Proj Y Proj Z 0 ($2,500,000) ($2,500,000) 1 2,100,000 950,000 2 875,000 863,000 3 —...

ear

Proj Y

Proj Z

0

($2,500,000)

($2,500,000)

1

2,100,000

950,000

2

875,000

863,000

3

675,000

4

900,250

  1. Compare both projects using NPV if the cost of capital is 10%.
  2. Compare each project using the IRR approach.
  3. Now compare both projects using the equivalent annual annuity (EAA) method.
  4. Compare each project using the replication approach.

Solutions

Expert Solution

Q1)using financial calculator to calculate Npv

Project Y

Inputs : C0= -2,500,000

C1= 2,100,000. Frequency= 1

C2= 875,000. Frequency= 1

I = 10%

Npv =compute

We get, NPV= $132,231.41

Project Z

Inputs: C0 = -2,500,000

C1 = 950,000. Frequency= 1

C2 = 863,000. Frequency= 1

C3 = 675,000. Frequency= 1

C4 = 900,250. Frequency= 1

I = 10%

Npv = compute

We get, NPV= $198,879.86

On the basis of Npv , we will choose project Z as it has higher Npv

Q2) Using financial calculator to calculate irr

ProjectY

Inputs: C0 = -2,500,000

C1 = 2,100,000. Frequency = 1

C2= 875,000. Frequency=1

Irr = compute

We get, Irr = 14.55%

Project Z

Inputs : C0 = -2,500,000

C1 = 950,000. Frequency= 1

C2 = 863,000. Frequency= 1

C3 = 675,000. Frequency= 1

C4 = 900,250. Frequency= 1

Irr = compute

We get, Irr = 13.72%

on the basis of irr , we will choose project Y.

C) EAA approach

Project Y

Eaa = r x Npv / 1- ( 1 + r ) ^ -n

= 10% × 132,231.41 / 1 - ( 1+ 0.1)^ - 2

= 13,223 / 1 - (1.1) ^ -2

= 13,223 / 1 - 0.8264

= 13,223 / 0.1736

= $76,190

Project Z

Eaa = r × Npv / 1 - (1 + r ) ^ -n

= 10% × 198,879.86 / 1 - (1+0.1)^ - 4

= 19,888 / 1 - (1.1)^ -4

= 19,888 / 1 - 0.6830

= 19,888 / 0.3170

= $ 62,740.83


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