Question

BC Co.’s assets consist of $20 thousands in cash and three investment projects. The firm hasno debt outstanding. The company can borrow and lend at 12% per year. Each project lasts foronly one year. The table below lists the cash flows from the projects at the initial date (t= 0)and at the end of the year (t= 1). Cash outflows are listed as negative numbers, while cashinflows are listed as positive. All figures are in thousands of dollars.

0 1

Project x -200 +240

Project y +100 -134

Project z -100 +108

1. Calculate the Internal Rate of Return (IRR) of each project.

2. Which projects should the firm invest in and why?

3. How much would you pay today, before any investments have been made, to buy this

firm?

Answer 1

1:

	Project X	Project Y	project Z
IRR	20.00%	34.00%	8.00%

2: The NPVs are as follows

	Project X	Project Y	project Z
NPV	14.29	-19.64	-3.57

The firm should invest in Project X since it has highest NPV

3: Total value of the firm = Total cash +Sum of NPV = 20+14.29-19.64-3.57 = $11.08 thousand