In: Finance
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
Year | Cash flows of Project S | Discount factor@11% | Present Value@11% | Discount [email protected]% | Present [email protected]% | Cash flows of Project L | Present Value@11% | Discount [email protected]% | Present [email protected]% |
- | (6,000.00) | 1.00 | (6,000.00) | 1.0000 | -6,000.00 | (3,500.00) | (3,500.00) | 1.00 | -3,500.00 |
1.00 | 4,000.00 | 0.90 | 3,603.60 | 0.7612 | 3,044.60 | 2,000.00 | 1,801.80 | 0.75 | 1,492.31 |
2.00 | 3,000.00 | 0.81 | 2,434.87 | 0.5794 | 1,738.05 | 1,000.00 | 811.62 | 0.56 | 556.75 |
3.00 | 2,000.00 | 0.73 | 1,462.38 | 0.4410 | 881.95 | 2,000.00 | 1,462.38 | 0.42 | 830.85 |
4.00 | 1,000.00 | 0.66 | 658.73 | 0.3356 | 335.65 | 2,000.00 | 1,317.46 | 0.31 | 619.94 |
NPV | 2,159.58 | - | NPV | 1,893.27 | - | ||||
IRR | 31.38% | 34.02% |
Ans a. NPV and IRR of project S is $2159.58 and 31.38%.
Ans b. NPV and IRR of project L is $1893.27 and 34.02%.
Ans c. Since the projects are mutually exclusive and there is no capital rationing then both the projects can be selected as their NPV is positive.
Ans d. Since both the projects are independent and only one can be selected then select project S as its NPV is higher.