Question

In: Finance

Your division is considering two investment projects, each of which requires an up-front expenditure of $23...

Your division is considering two investment projects, each of which requires an up-front expenditure of $23 million. You estimate that the investments will produce the following net cash flows: Year

Year Project A Project B

1 $ 6,000,000 $20,000,000

2 10,000,000 10,000,000

3 20,000,000 8,000,000

What are the two projects' net present values, assuming the cost of capital is 5%? Round your answers to the nearest dollar.

Project A $ Project B $

What are the two projects' net present values, assuming the cost of capital is 10%? Round your answers to the nearest dollar.

Project A $ Project B $

What are the two projects' net present values, assuming the cost of capital is 15%? Round your answers to the nearest dollar.

Project A $ Project B $

What are the two projects' IRRs at these same costs of capital? Round your answers to two decimal places.

Project A % Project B %

Solutions

Expert Solution

A)
Year Project A Project B PV @ 5% PV Project A PV Project B
0 -$23,000,000.00 -$23,000,000.00 1.0000 -$23,000,000.00 -$23,000,000.00
1 $6,000,000.00 $20,000,000.00 0.9524 $5,714,285.71 $19,047,619.05
2 $10,000,000.00 $10,000,000.00 0.9070 $9,070,294.78 $9,070,294.78
3 $20,000,000.00 $8,000,000.00 0.8638 $17,276,751.97 $6,910,700.79
IRR NPV $9,061,332 $12,028,615
B)
Year Project A Project B PV @ 10% PV Project A PV Project B
0 -$23,000,000.00 -$23,000,000.00 1.0000 -$23,000,000.00 -$23,000,000.00
1 $6,000,000.00 $20,000,000.00 0.9091 $5,454,545.45 $18,181,818.18
2 $10,000,000.00 $10,000,000.00 0.8264 $8,264,462.81 $8,264,462.81
3 $20,000,000.00 $8,000,000.00 0.7513 $15,026,296.02 $6,010,518.41
IRR NPV $5,745,304 $9,456,799
C)
Year Project A Project B PV @ 15% PV Project A PV Project B
0 -$23,000,000.00 -$23,000,000.00 1.0000 -$23,000,000.00 -$23,000,000.00
1 $6,000,000.00 $20,000,000.00 0.8696 $5,217,391.30 $17,391,304.35
2 $10,000,000.00 $10,000,000.00 0.7561 $7,561,436.67 $7,561,436.67
3 $20,000,000.00 $8,000,000.00 0.6575 $13,150,324.65 $5,260,129.86
IRR NPV $2,929,153 $7,212,871
D)
Year Project A Project B
0 -$23,000,000.00 -$23,000,000.00
1 $6,000,000.00 $20,000,000.00
2 $10,000,000.00 $10,000,000.00
3 $20,000,000.00 $8,000,000.00
IRR 21.18% 37.15%

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