Question

Problem 10-07
NPV

Your division is considering two investment projects, each of which requires an up-front expenditure of $19 million. You estimate that the investments will produce the following net cash flows:

Year	Project A	Project B
1	$  5,000,000	$20,000,000
2	10,000,000	10,000,000
3	20,000,000	6,000,000

1. 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 $

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

   Project B     %

Answer 1

Part (a)
Cost of capital =		5%
		Project A			Project B
			P.V.F. @5%	Present value		P.V.F. @5%	Present value
Cash flow at Year 0
Upfront expenditure		-19000000	1	-19000000	-19000000	1	-19000000
Cash flow at Year 1		5000000	0.952380952	4761904.762	20000000	0.952380952	19047619.05
Cash flow at Year 2		10000000	0.907029478	9070294.785	10000000	0.907029478	9070294.785
Cash flow at Year 3		20000000	0.863837599	17276751.97	6000000	0.863837599	5183025.591
NPV				12108951.52			14300939.42
IRR	=IRR(E7:E12,10)			29.60%			53.11%
Project A's NPV =		$12,108,951.52
Project B's NPV =		$14,300,939.42
Cost of capital =		10%
		Project A			Project B
			P.V.F. @10%	Present value		P.V.F. @5%	Present value
Cash flow at Year 0
Upfront expenditure		-19000000	1	-19000000	-19000000	1	-19000000
Cash flow at Year 1		5000000	0.909090909	4545454.545	20000000	0.909090909	18181818.18
Cash flow at Year 2		10000000	0.826446281	8264462.81	10000000	0.826446281	8264462.81
Cash flow at Year 3		20000000	0.751314801	15026296.02	6000000	0.751314801	4507888.805
NPV				8836213.373			11954169.8
IRR	=IRR(E7:E12,10)			29.60%			53.11%
Project A's NPV =		$8,836,213.37
Project B's NPV =		$11,954,169.80
Cost of capital =		15%
		Project A			Project B
			P.V.F. @15%	Present value		P.V.F. @5%	Present value
Cash flow at Year 0
Upfront expenditure		-19000000	1	-19000000	-19000000	1	-19000000
Cash flow at Year 1		5000000	0.869565217	4347826.087	20000000	0.869565217	17391304.35
Cash flow at Year 2		10000000	0.756143667	7561436.673	10000000	0.756143667	7561436.673
Cash flow at Year 3		20000000	0.657516232	13150324.65	6000000	0.657516232	3945097.395
NPV				6059587.409			9897838.415
IRR	=IRR(E7:E12,10)			29.60%			53.11%
Project A's NPV =		$6,059,587.41
Project B's NPV =		$9,897,838.42
Part (b)
IRR of project A (as calculated above) =				29.60%
IRR of project B (as calculated above) =				53.11%
At any cost of capital, IRR shall remain same.