Question

BBB Manufacturing Company has considered investing in two independent projects, which both will result in a cost of $1,200,000. Each project is expected to last 5 years. Project A ‘s annual cash flows are listed as follows: Year 1: $325,000; Year 2: $440,000; Year 3: $270,000 Year 4: $550,000; and Year 5: $265,000. Project B annual cash flows are listed as follows: Year 1: $880,000; Year 2: $500,000; Year 3: $300,000; Year 4: $200,000; and Year 5: $1,000. BBB’s cost of capital is 9%. In excel:

1. Calculate each project’s NPV.
2. Compute each project’s IRR.
3. Calculate Payback Period for both projects
4. As the financial analyst evaluating this project, would you accept/reject one or accept or reject both? Would your answer change if the projects were mutually exclusive?

**Please please show formulas/explain how you got the answers in the cells. I'm very confused on this and appreciate the help. Thank you!

Answer 1

Calculation are given below

D. If both the projects are independent then in this case both can be accepted as NPV is positive and IRR is also higher than cost of capital. If they are mutually exclusive then project B should be selected as it has higher NPV and IRR then project A

Working is given below