Question

Use the following information to answer the next three questions.

Consider the cash flows from two mutually exclusive projects:

	Cash Flow
Year	Project A	Project B
0	-$470,000	-$460,000
1	$120,000	$392,000
2	$210,000	$110,000
3	$375,000	$120,000

The appropriate discount rate is 11.7%.

Calculate the net present value (NPV) for both projects, and determine which project should be accepted based on NPV. Round both NPVs to the nearest dollar.

Calculate the internal rate of return (IRR) for both projects, and determine which project should be accepted based on IRR.

Calculate the net present value (NPV) for both projects using the crossover rate as your discount rate. Round both NPVs to the nearest dollar.

show work please

Answer 1

NPV of Project A =PV of Cash Flows-Initial Investment =120000/(1+11.7%)+210000/(1+11.7%)^2+375000/(1+11.7%)^3-470000 =74815.80 or 74816
NPV of Project B =PV of Cash Flows-Initial Investment =392000/(1+11.7%)+110000/(1+11.7%)^2+120000/(1+11.7%)^3-460000=65206.70 or 65207

IRR of Project A using Financial calculator
CF0 =-470000;CF1=120000;CF2=210000;CF3=375000;CPT IRR =19.19%
IRR of Project A using Financial calculator
CF0 =-460000;CF1=392000;CF2=110000;CF3=120000;CPT IRR =22.24%

For Cross over rate
Incremental Cash flow in year 0=-470000-(-460000) =-10000
Incremental Cash flow in year 1=120000-(392000) =-272000
Incremental Cash flow in year 2=210000-(110000) =100000
​​​​​​​Incremental Cash flow in year 3=375000-120000 =255000
IRR using incremental cash flow
CF0=-10000;CF1=-272000;CF3=100000;CF4=255000;CPT IRR =14.12391885%

NPV of cash flows at crossover rate of Project A
=120000/(1+14.12391885%)+210000/(1+14.12391885%)^2+375000/(1+14.12391885%)^3-470000=48677
NPV of cash flows at crossover rate of Project B
=392000/(1+14.12391885%)+110000/(1+14.12391885%)^2+120000/(1+14.12391885%)^3-460000=48677
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