Question
In: Finance
Use the following information to answer the next three questions. Show ALL your work! Consider the...
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.
Solutions
Expert Solution
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.
jeff jeffy answered 2 years agoRelated Solutions
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