Question

The Camel Company is considering two mutually exclusive projects with the following cash flows. Assume discount rate of 12%.

Compute NPV, IRR, PI. Assume the discount rate is 12%. Please recommend the firm which project(s) to choose under the following scenarios:

Year	Project A cash flow	Project B Cash flow
0	-75,000	$-60,000
1	$30,000	$25,000
2	$35,000	$30,000
3	$35,000	$25,000

1.     Assume Independent Projects: (i) which project(s) would you recommend? (ii) Would your answer change if the firm is financially constrained, and the budget allotted is $80,000.
2.     Assume Mutually Exclusive Projects: (i) which project(s) would you recommend? (ii) Would your answer change if the firm is financially constrained, and the budget allotted is $80,000.
3.     Compute Payback period for both projects.

Answer 1

	A	B	C
1	Year	Project A cash flow	Project B Cash flow
2	0	-$75,000.00	-$60,000.00
3	1	$30,000	$25,000
4	2	$35,000	$30,000
5	3	$35,000	$25,000
6	Rate	0.12
	NPV	$4,599.81	$4,031.75
	Using Excel formula	NPV(12%,B3:B5)	NPV(12%,C3:C5)
	PI	1.06	1.07
	Using Excel formula	1+4599.81/75000	1+4031.75/60000
	IRR	15.44%	15.86%
	Using Excel formula	IRR(B2:B5)	IRR(C2:C5)

a) If independent project then both projects should be chosen because NPV are both positive.
If the budget has 80,000 Project A should be accepted because NPV of A is higher
b)If mutually exclusive project then Project A should be accepted. If Budget is 80,000 Project A must be accepted because NPV is higher.
c)

Year	0	1	2	3
Project A cash flow	-$75,000.00	$30,000	$35,000	$35,000
Cumulative Cash flow	-$75,000.00	-45000.00	-10000.00	25000.00
Pay Back Period	$2.29	(Formula=2+10000/35000)
Project B Cash flow	-$60,000.00	$25,000	$30,000	$25,000
Cumulative Cash flow	-$60,000.00	-35000.00	-5000.00	20000.00
Pay Back Period	$2.20	(Formula=2+5000/25000)

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