Question

In: Accounting

You are the CFO of ABC, LLC. You have been given data for two different projects....

You are the CFO of ABC, LLC. You have been given data for two different projects. You can only choose one. Calculate the Net Present Value, Internal Rate of Return, Profitability Index and Pay Back Period for each of the projects. Make a recommendation based on your findings. You must do all calculations in Excel and use formulas. You must also explain why you chose the project. All of this should be on one tab of an excel spreadsheet.

Here is the project data. All values are in 000’s and should be presented as such in your work.

Project A Discount rate is 10%. The initial investment is $600. Cash flows for the following five years are; $100, $200, $250, $100, and $300. At the end of the fifth year, the project is over, and all related assets are liquidated for $200. All inflows and outflows occur at the end of the period.

Project A Discount rate is 7%. The initial investment is $350. Cash flows for the following five years are; $150, $250, $100, $100, and $200. At the end of the fifth year, the project is over, and all related assets are liquidated for $100. All inflows and outflows occur at the end of the period.

Solutions

Expert Solution

Project A.

Year cash flow pvfactor Npv cumulative cf

0 (600) 1 (600) (600)

1 100 0.909 90.9 (509.1)

2 200 0.826 165.2 (343.9)

3 250 0.751 187.75 (156.15)

4 100 0.683 68.3 (87.85)

5 300 0.620 186 98.15

5 200 0.620 124 222.15

222.15

  

Hence Npv of project 1 is 222.15

IRR of project 1 is calculated as trial & error method by assuming rate as 20 % & 25%

At 20% Npv is

Year Cf Factor Npv

0 ( 600) 1 (600)

1 100 .833 83.3

2 200 .694 138.8

3 250 .579 144.75

4 100 .482 48.2

5 500 .402 201

Positive npv 16.05

At 25% rate   

Year CF factor NPV

0 (600) 1 (600)

1 100 .8 80 88

2 200 .64 128

3 250 .512 128

4 100 .410 41

5 500 .328 164

Negative NPv 59

Irr is the rate at which diffrence of present value of cash flow & initial investment is 0 hence

Formula of IRR=

Lower rate of NPv + (value of lower rate Npv/ lower rate npv - higher rate npv ) * difference of rates

Hence 20+(16.05/16.05+59)*5

=21.07

Payback period is period in which total amt shall recover so formula is

A +(B/c)

n the above formula,

A is the last period with a negative cumulative cash flow;

B is the absolute value of cumulative cash flow at the end of the period A;

C is the total cash flow during the period after A

Hence payback period is

4 +87.85/186

=4.47 year

Profitability index= present value of cash flows / intial investment

Hence 822.15/600

=1.370

Now project B at 7%

Formulas were same as above hence only calculation is present

Year cash flow pv factor Npv cumu.cf

0 350 1 (350) (350)

1 150 0.935 140.25 (209.75)

2 250 0.873 218.25 8.5

3 100 0.816 81.6 90

4 100 0.763 76.3 166.4

5 200 0.713 142.6 309

5 100 0.713 71.3 380.3

Npv of projct 2 is 380.3

iRR of project B is assumed at 40% & 45%

At 40% there is poitive NPV 2.8

At 45% there is negative npv of (25.3)

As calculated same as above by factors of 40% & 45%

Hence IRR =

40(2.8/28.1)*5

=40.5%

Payback period = same as above formula in project A

1+209.75/218.25

=1.96 year

Profitability index= use above formula

730.3/350

=2.087year

=

Observation

Project A projectB

Npv 222.15 380.3

IRR 21.07 40.5

Payback 4.47 1.96

Period

Profitability

Index 1.370 2.087

Hence we should accept project B because higher Npv .irr ia higher & amt of investment recover in only 1.96

& when investment amt is different we calculate profitability index hence in both project profitability index higher also in project B thats why

Project B is prefered


Related Solutions

You have been named the Chief Financial Officer (CFO) of a two year old company, ABC...
You have been named the Chief Financial Officer (CFO) of a two year old company, ABC Analytics. Financials have been prepared by a bookkeeper. As CFO, you responsible for the preparation of accurate financials, analysis and review of the financials before they are released and communication of the results of your company to banks, investors, creditors and the government, as necessary. One of the members of the board has asked you to prepare a memorandum which addresses the following points....
You are the CFO of a business and have the opportunity to evaluate two different investment...
You are the CFO of a business and have the opportunity to evaluate two different investment opportunities. Information related to these investments follows: Investment 1 Investment 2 Investment Cost $   800,000 $   500,000 Salvage Value $   40,000   $   50,000   Useful Life 8 years 15 years Required Rate of Return 10% 10% Sales $   450,000 $   400,000 Variable Costs $   150,000 $   175,000 Fixed Costs (excluding depreciation) $   100,000 $   150,000 Tax Rate 35% 35% Your company has a required rate...
You are the CFO of a business and have the opportunity to evaluate two different investment...
You are the CFO of a business and have the opportunity to evaluate two different investment opportunities. Information related to these investments follows: Investment 1 Investment 2 Investment Cost $   800,000 $   500,000 Salvage Value $   40,000   $   50,000   Useful Life 8 years 15 years Required Rate of Return 10% 10% Sales $   450,000 $   400,000 Variable Costs $   150,000 $   175,000 Fixed Costs (excluding depreciation) $   100,000 $   150,000 Tax Rate 35% 35% Your company has a required rate...
Two energy saving project have been identified by Company ABC. These potential projects are known as...
Two energy saving project have been identified by Company ABC. These potential projects are known as project A and 8 . The projects require different investments and costs as indicated in the Table below .. Financial item OPTION A (million) OPTION B (million) First cost 5000 700 Economic life in years 10 5 Salvage value 100 150 Annual operating costs 5 10 Major overhaul costs in year 5 20 0 Increase in annual operating costs from year and thereafter 1.5...
You have been given the task of calculating the WACC of ABC Inc. You will use...
You have been given the task of calculating the WACC of ABC Inc. You will use the following information to calculate the WACC. The firm has 3000 coupon paying bonds outstanding. Each coupon-paying bond has a face value of $1000, will mature 10 years from today, and is currently priced at 130% of the face value. The annual coupon rate is 12%, and coupon is paid on an annual basis. The company has 500,000 common shares outstanding, and each share...
You have been given the task of calculating the WACC of ABC Inc. You will use...
You have been given the task of calculating the WACC of ABC Inc. You will use the following information to calculate the WACC. The firm has 3000 coupon paying bonds outstanding. Each coupon-paying bond has a face value of $1000, will mature 10 years from today, and is currently priced at 130% of the face value. The annual coupon rate is 12%, and coupon is paid on an annual basis. The company has 500,000 common shares outstanding, and each share...
As CFO of Gaga Inc., you are considering two projects, each with a cost of capital...
As CFO of Gaga Inc., you are considering two projects, each with a cost of capital of 11%, with the following cash flows: t =               0   1     2     3      4     Project S -6000 4000 3000 2000 1000 Project L -3500 2000 1000 2000 2000 What is the NPV and IRR of Project S? (2 pts)   What is the NPV and IRR of Project L? (2 pts) Which project(s) should you choose if they are mutually exclusive and there is...
You have been asked to determine if two different production processes have different mean numbers of...
You have been asked to determine if two different production processes have different mean numbers of units produced per hour. Process 1 has a mean defined as μ1 and process 2 has a mean defined as μ2. The null and alternative hypotheses are Upper H 0​: μ1 − μ2 less than or equals ≤0 and Upper H 1 : mu 1 minus mu 2 greater than 0 H1: μ1−μ2>0. The process variances are unknown but assumed to be equal. Using...
You have been provided information on summary statistical data for two neighborhoods. Specifically, you have been...
You have been provided information on summary statistical data for two neighborhoods. Specifically, you have been provided calculations on the Average Price Per Square Foot, Average Age and Average, and the Average Prices for houses in the two neighborhoods and the Standard Deviation of each variable. Apply the method of Confidence Intervals at (97%) to Estimate answer the question whether: Average Age of House in each neighborhood is significantly different from 60 years Average Price of Houses in each neighborhood...
you have $100 to invest in two different investment projects, A and B, the total returns...
you have $100 to invest in two different investment projects, A and B, the total returns from which (TR and TR) are given below. the cost of purchasing a unit of investment in each project is $10 per unit. your problem is to invest the $100 in the two invest the $100 in the two investments so as to maximize your total return (for example, if you invested the entire $100 in investment B, you would receive a total return...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT