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 |
— |
675,000 |
4 |
— |
900,250 |
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