Question

Consider

Sky Fly, Inc is a fast growing drone manufacturer. The annual rate of return of Sky Fly's stock has been 20% over the past few years. Company managers believe 20% is a good estimate for the firms' cost of capital. Sky Fly's CEO, Dane Cooper, believes the company needs to continue to invest in projects that offer the highest possible returns. Currently, the company is reviewing two separate projects. Project E involves expanding production capacity. Project I involves introducing one of the firms' drones into a new market. The following table shows the projected cash flows for each project.

Year	E	I
0	-3,500,000	-500,000
1	1,500,000	250,000
2	2,000,000	350,000
3	2,500,000	375,000
4	2,750,000	425,000

Discuss

• Calculate the NPV, IRR, and PI for both projects.
• Rank the projects based on their NPV, IRR, and PI.
• The firm can only afford to take on one investment.
  • Which project will the CEO likely favor?
  • What do you think the company should do?

Explain your answers.

Answer 1

Solution.>

I have solved this question in Excel. The formula used are written along with the values. If you still have any doubt, kindly ask in the comment section.

Note: Give it a thumbs up if it helps! Thanks in advance!