Question

Botany Bay, Inc., a maker of casual clothing, is considering four projects shown in the following table,

Initial investment Project A $50,100 Project B $99,400 Project C $79,100 Project D $180,500
Year Cash inflows          
1 $19,300 $36,200 $19,200 $100,700
2 $19,300 $51,100 $39,100 $80,400
3 $19,300 $51,500 $61,000 $61,000

. Because of past financial difficulties, the company has a high cost of capital at 14.3 %.

a. Calculate the NPV of each project, using a cost of capital of 14.3 %.

b. Rank acceptable projects by NPV.

c. Calculate the IRR of each project and use it to determine the highest cost of capital at which all of the projects would be acceptable.

Answer 1

Cash flow are as follows

Year	Project A	B	C	D
0	-50100	-99400	-79100	-180500
1	19300	36200	19200	100700
2	19300	51100	39100	80400
3	19300	51500	61000	61000
A: NPV	($5,517.10)	$5,872.74	$8,476.27	$9,992.26
B: Ranks	4	3	2	1
C: IRR	7.60%	17.60%	19.56%	17.89%

The highest cost of capital at whcih all projects would be acceptable is 7.6%.

WORKINGS