Question

INSTRUCTIONS:

1. Read the information below, including Parts a and b of Question 1.
2. Create a new Excel spreadsheet. Record your answers to all parts of the question into the spreadsheet. Use bold text to clearly label your responses to Part a and Part b. Save your work regularly

(a) For the following mutually exclusive projects (A, B, C and D), find the Payback period, NPV, and IRR. The required rate of return is 11.00%.p.a. Assume all future cash flows only occur by the end of each year. Based on your results, which project should be accepted and why.

Year	0	1	2	3	4	5	6
A	-7,500	1,500	2,500	3,000	2000	1500	1,000
B	-4,100	1200	1200	1200	1200	1200
C	-5,500	2,000	2,000	2,000	2,000
D	-3,500	1,700	1,700	1,700

(b) AAA energy company is considering a project of solar energy plant. There are two different grades of solar panel under consideration. These two grades of solar panel come with different cost and efficiency. Grade A is the best in efficiency and lasts for 15 years with higher cost. Grade B is less efficient and lasts for 10 years, but the cost if lower. The company has already secured the land usage contract for the energy plant. The local government has granted the company free usage of the land as long as it operates as support for green energy and environment. The company intends to operate the project for infinite time, which means that the solar panels will be replaced once they reached their maximum useful life. The project team provided some estimated figures as below:

Detail	Grade A	Grade B
Purchase Price	$545,000	$350,000
Yearly Revenue	$110,000	$85,000
Yearly Costs	($12,000)	($8,000)
Salvage Value	$10,000	$9,000
Useful Life	15 years	10 years

Assuming it’s a perfect capital market that there are no taxes or inflation, so the above figures won't change in the future. The project team conducted a further analysis and provided some information below:

Project beta 1.5, risk free rate 5%.p.a, and expected market return 11%.p.a.

Please complete the analysis for AAA energy company and provide advice on the choice of solar panel.

Answer 1

a]	PROJECT A:
	Year	Cash Flow	Cumulative Cash Flow	PVIF at 11%	PV at 11%	PVIF at 15%	PV at 15%	PVIF at 14%	PV at 14%
	0	$               (7,500)	$          (7,500)	1	$           (7,500)	1	$          (7,500)	1	$       (7,500)
	1	$                  1,500	$          (6,000)	0.90090	$             1,351	0.86957	$            1,304	0.87719	$          1,316
	2	$                  2,500	$          (3,500)	0.81162	$             2,029	0.75614	$            1,890	0.76947	$          1,924
	3	$                  3,000	$              (500)	0.73119	$             2,194	0.65752	$            1,973	0.67497	$          2,025
	4	$                  2,000	$            1,500	0.65873	$             1,317	0.57175	$            1,144	0.59208	$          1,184
	5	$                  1,500	$            3,000	0.59345	$                 890	0.49718	$                746	0.51937	$             779
	6	$                  1,000	$            4,000	0.53464	$                 535	0.43233	$                432	0.45559	$             456
					$                 816		$                (11)		$             183
	Payback period = 3+500/2000 =		3.25	Years
	NPV =			$                 816
	IRR = 15%-1%*11/(11+183) =		14.94%
	PROJECT B:
	Payback period = 4100/1200 =		3.42	Years
	NPV = -4100+1200*(1.11^5-1)/(0.11*1.11^5) =	$                 335
	IRR:
	When discounted at IRR,
	4100 = 1200*PVIFA(irr,5)
	PVIFA(irr,5) = 4100/1200 =	3.4167
	Annuity interest factors for 14% &	14%	15%
	15% for n = 5 are		3.4331	3.3522
	IRR = 14%+1%*(3.4331-3.4167)/(3.4331-3.3522) =	14.20%
	PROJECT C:
	Payback period = 5500/2000		2.75	Years
	NPV = -5500+2000*(1.11^4-1)/(0.11*1.11^4) =	$                 705
	IRR:
	PVIFA(irr,4) = 5500/2000 =	2.7500
			16%	17%
	Annuity interest factors for 16% &	2.7982	2.7432
	and 17% for n = 4 are =
	IRR = 16%+1%*(2.7982-2.75)/(2.7982-2.7432) =	16.88%
	Project D:
	Payback period = 3500/1700 =		2.06
	NPV = -3500+1700*(1.11^3-1)/(0.11*1.11^3) =	$                 654
	IRR:
	PVIFA(iir,3) = 3500/1700 =	2.0588
	Annuity interest factors for 21% &	21%	22%
	22% for n = 3 are		2.0739	2.0422
	IRR = 21%+1%*(2.0739-2.0588)/(2.0739-2.0422) =	21.48%
	TABULATION OF RESULTS AND RECOMMENDATION
	Project	Payback in Years	NPV	IRR	Life in years	PVIFA at 11%	EANPV
	A	3.25	$                816	14.94%	6	4.23054	$                193
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