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In: Finance

Q) A firm has a WACC of 9.60% and is deciding between two mutually exclusive projects....

Q) A firm has a WACC of 9.60% and is deciding between two mutually exclusive projects. Project A has an initial investment of $60.12. The additional cash flows for project A are: year 1 = $19.64, year 2 = $35.94, year 3 = $43.15. Project B has an initial investment of $74.74. The cash flows for project B are: year 1 = $57.52, year 2 = $47.69, year 3 = $31.12. Calculate the Following:
    -Payback Period for Project A:
    -Payback Period for Project B:
    -NPV for Project A:
    -NPV for Project B:
Q2) Project Z has an initial investment of $62,309.00 . The project is expected to have cash inflows of $20,282.00 at the end of each year for the next 11.0 years. The corporation has a WACC of 12.35%. Calculate the NPV for project Z.

Solutions

Expert Solution

Q1) Project A Project B
Payaback Period 2.11 Years 1.36 Years
NPV $ 20.49 $ 41.08
Working:
Project A
Year Cash fows Cumulative cash flows Discount factor Present Value
a b c d=1.096^-a b*d
0 $    -60.12 $                              -60.12                     1.000 $             -60.12
1          19.64                                   -40.48                     0.912                   17.92
2          35.94                                     -4.54                     0.832                   29.92
3          43.15                                    38.61                     0.760                   32.78
Total                   20.49
Payaback period = 2+(4.54/43.15)
= 2.11 Years
Project B
Year Cash fows Cumulative cash flows Discount factor Present Value
a b c d=1.096^-a b*d
0 $    -74.74 $                              -74.74                     1.000 $             -74.74
1          57.52                                   -17.22                     0.912                   52.48
2          47.69                                    30.47                     0.832                   39.70
3          31.12                                    61.59                     0.760                   23.64
Total                   41.08
Payaback period = 1+(17.22/47.69)
= 1.36 Years
Q2)
NPV $        56,299.33
Working:
a. Present Value of annuity of 1 = (1-(1+i)^-n)/i Where,
= (1-(1+0.1235)^-11)/0.1235 i 12.35%
=                   5.848 n 11
b. Present value of annual cash inflows $      20,282.00 x         5.848 = $ 1,18,608.33
Less:Costs of Project $     62,309.00
NPV $     56,299.33

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