Question

You are a senior manager at Nittany Aircraft and have been authorized to spend up to $550,000 for projects. The three projects you are considering have the following characteristics:

Project A: Initial investment of $420,000. Cash flow of $195,000 at year 1 and $235,000 at year 2. This is a plant expansion project, where the required rate of return is 13 %.

Project B: Initial investment of $210,000. Cash flow of $180,000 at year 1 and $140,000 at year 2. This is a new product development project, where the required rate of return is 16 %.

Project C: Initial investment of $165,000. Cash flow of $145,000 at year 1 and $90,000 at year 2. This is a market expansion project, where the required rate of return is 16 %.     

Assume the corporate discount rate is 17 %.

What is the IRR of project A? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations)

What is the NPV of project A? (Round answer to 2 decimal places. Do not round intermediate calculations)

What is the PI of project A? (Round answer to 2 decimal places. Do not round intermediate calculations)

What is the IRR of project B? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations)

What is the NPV of project B? (Round answer to 2 decimal places. Do not round intermediate calculations)

What is the PI of project B? (Round answer to 2 decimal places. Do not round intermediate calculations)

What is the IRR of project C? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations)

What is the NPV of project C? (Round answer to 2 decimal places. Do not round intermediate calculations)

What is the PI of project C? (Round answer to 2 decimal places. Do not round intermediate calculations)

What is the incremental IRR (aka, crossover point) between Project B & Project C? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations)

Answer 1

Solution :- Project A :-

NPV of Project A = Present value of cash inflows of Project A - Present value of cash outflow of Project A.

= [ 195000 / (1.13)¹ + 235000 / (1.13)² ] - 420000.

= (195000 / 1.13 + 235000 / 1.2769) - 420000.

= (172566.37 + 184039.47) - 420000.

= 356605.84 - 420000

= (-) 63394.16 Dollars.

Profitability index (PI) of Project A =  Present value of cash inflows of Project A / Present value of cash outflow of Project A.

= 356605.84 / 420000

= 0.85 (approx).

Project B :-

NPV of Project B = Present value of cash inflows of Project B - Present value of cash outflow of Project B.

= [ 180000 / (1.16)¹ + 140000 / (1.16)² ] - 210000.

= (180000 / 1.16 + 140000 / 1.3456) - 210000.

= (155172.41 + 104042.81) - 210000.

= 259215.22 - 210000

= $ 49215.22

Profitability index (PI) of Project B =  Present value of cash inflows of Project B / Present value of cash outflow of Project B.

= 259215.22 / 210000

= 1.23

Project C :-

NPV of Project C = Present value of cash inflows of Project C - Present value of cash outflow of Project C.

= [ 145000 / (1.16)¹ + 90000 / (1.16)² ] - 165000.

= (145000 / 1.16 + 90000 / 1.3456) - 165000.

= (125000 + 66884.66) - 165000.

= 191884.66 - 165000.

= $ 26884.66

Profitability index (PI) of Project C =  Present value of cash inflows of Project C / Present value of cash outflow of Project C.

= 191884.66 / 165000.

= 1.16

Conclusion :-

NPV of Project A	(-) 63394.16
Profitability index (PI) of Project A	0.85
NPV of Project B	$ 49215.22
Profitability index (PI) of Project B	1.23
NPV of Project C	$ 26884.66
Profitability index (PI) of Project C	1.16