Question

Use the following information to answer the next three questions. Show ALL your work!

Consider the cash flows from two mutually exclusive projects:

	Cash Flow
Year	Project A	Project B
0	-$420,000	-$420,000
1	$150,000	$390,000
2	$230,000	$110,000
3	$321,000	$140,000

The appropriate discount rate is 11.7%.

-Calculate the net present value (NPV) for both projects, and determine which project should be accepted based on NPV. Round both NPVs to the nearest dollar.

-Calculate the internal rate of return (IRR) for both projects, and determine which project should be accepted based on IRR.

-Calculate the net present value (NPV) for both projects using the crossover rate as your discount rate. Round both NPVs to the nearest dollar.

Answer 1

Computation of NPV of Both Projects:

				Present Value of Cash Flow
Year	Project A	Project B	PVF @ 11.7%	Project A	Project B
1	1,50,000	3,90,000	0.89525515	1,34,288.27	3,49,149.51
2	2,30,000	1,10,000	0.80148178	1,84,340.81	88,163.00
3	3,21,000	1,40,000	0.71753069	2,30,327.35	1,00,454.30
	Present Value of Cash Inflows			5,48,956.43	5,37,766.80
	Cash OutFlow			-4,20,000	-4,20,000
	NPV			9,68,956	9,57,767

Conclusion: Based on NPV Project A has to be selected as NPV is Higher.