Question

Your division is considering two projects with the following cash flows (in millions):

0

1

2

3

Project A	-$20	$5	$9	$12
Project B	-$13	$8	$7	$3

1. What are the projects' NPVs assuming the WACC is 5%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:    $   million

   Project B:    $   million

   What are the projects' NPVs assuming the WACC is 10%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:  $   million

   Project B:  $   million

   What are the projects' NPVs assuming the WACC is 15%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:  $   million

   Project B:  $   million

2. What are the projects' IRRs assuming the WACC is 5%? Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:    %

   Project B:    %

   What are the projects' IRRs assuming the WACC is 10%? Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:    %

   Project B:    %

   What are the projects' IRRs assuming the WACC is 15%? Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:    %

   Project B:    %

Answer 1

a. NPV of Project A at 5% =PV of Cash Flows-Initial Investment =5/1.05+9/1.05^2+12/1.05^3-20=3.29
NPV of Project B at 5% =PV of Cash Flows-Initial Investment =8/1.05+7/1.05^2+3/1.05^3-13=3.56

b. NPV of Project A at 10% =PV of Cash Flows-Initial Investment =5/1.10+9/1.10^2+12/1.10^3-20=1.00
NPV of Project B at 10% =PV of Cash Flows-Initial Investment =8/1.10+7/1.10^2+3/1.10^3-13=2.31

c. NPV of Project A at 10% =PV of Cash Flows-Initial Investment =5/1.15+9/1.15^2+12/1.15^3-20=-0.96
NPV of Project B at 10% =PV of Cash Flows-Initial Investment =8/1.15+7/1.15^2+3/1.15^3-13=1.22

b. IRR remains same irrespective of WACC

IRR using Financial Calculator (IRR of Project A at 5%)
CF0=-20;CF1=5;CF2=9;CF3=12;CPT IRR =12.46%
IRR using Financial Calculator (IRR of Project B at 5%)
CF0=-13;CF1=8;;CF2=7;CF3=3;CPT IRR =21.49%

IRR using Financial Calculator (IRR of Project A at 10%)
CF0=-20;CF1=5;CF2=9;CF3=12;CPT IRR =12.46%
IRR using Financial Calculator (IRR of Project B at 10%)
CF0=-13;CF1=8;;CF2=7;CF3=3;CPT IRR =21.49%

IRR using Financial Calculator (IRR of Project A at 15%)
CF0=-20;CF1=5;CF2=9;CF3=12;CPT IRR =12.46%
IRR using Financial Calculator (IRR of Project B at 15%)
CF0=-13;CF1=8;;CF2=7;CF3=3;CPT IRR =21.49%


c. At 5% Project A must be selected as it has Higher NPV
At 10% Project B must be selected as it has Higher NPV
At 15% Project B must be selected as it has Higher NPV