Question

Your division is considering two investment projects, each of which requires an up-front expenditure of $17 million. You estimate that the investments will produce the following net cash flows:

Year Project A Project B 1 $ 6,000,000 $20,000,000 2 10,000,000 10,000,000 3 20,000,000 7,000,000

a) What are the two projects' net present values, assuming the cost of capital is 5%? Round your answers to the nearest dollar.

Project A $.......

Project B $ .....

b) What are the two projects' net present values, assuming the cost of capital is 10%? Round your answers to the nearest dollar.

Project A $

Project B $

c) What are the two projects' net present values, assuming the cost of capital is 15%? Round your answers to the nearest dollar.

Project A $

Project B $

d) What are the two projects' IRRs at these same costs of capital? Round your answers to two decimal places.

Project A %

Project B %

Answer 1

(a) Computation of NPV assuming cost of capital of 5%

			Project A	Project B
Year	PVF @ 5% (A)	Initial cost (B)	Cash inflows (C)	Net cash flows (D)=(B)+(C)	Present value of cash outflows (A)*(D)	Cash inflows (E)	Net cash flows (F)=(B)+(E)	Present value of cash outflows (A)*(F)
0	1	(17,000,000)	-	(17,000,000)	(17,000,000)	-	(17,000,000)	(17,000,000)
1	0.9524	-	6,000,000	6,000,000	5,714,286	20,000,000	20,000,000	19,047,619
2	0.9070	-	10,000,000	10,000,000	9,070,295	10,000,000	10,000,000	9,070,295
3	0.8638	-	20,000,000	20,000,000	17,276,752	7,000,000	7,000,000	6,046,863
Net present value			15,061,332			17,164,777

(b) Computation of NPV assuming cost of capital of 10%

			Project A	Project B
Year	PVF @ 10% (A)	Initial cost (B)	Cash inflows (C)	Net cash flows (D)=(B)+(C)	Present value of cash outflows (A)*(D)	Cash inflows (E)	Net cash flows (F)=(B)+(E)	Present value of cash outflows (A)*(F)
0	1	(17,000,000)	-	(17,000,000)	(17,000,000)	-	(17,000,000)	(17,000,000)
1	0.9091	-	6,000,000	6,000,000	5,454,545	20,000,000	20,000,000	18,181,818
2	0.8264	-	10,000,000	10,000,000	8,264,463	10,000,000	10,000,000	8,264,463
3	0.7513	-	20,000,000	20,000,000	15,026,296	7,000,000	7,000,000	5,259,204
Net present value			11,745,304			14,705,485

(c) Computation of NPV assuming cost of capital of 15%

			Project A	Project B
Year	PVF @ 15% (A)	Initial cost (B)	Cash inflows (C)	Net cash flows (D)=(B)+(C)	Present value of cash outflows (A)*(D)	Cash inflows (E)	Net cash flows (F)=(B)+(E)	Present value of cash outflows (A)*(F)
0	1	(17,000,000)	-	(17,000,000)	(17,000,000)	-	(17,000,000)	(17,000,000)
1	0.8696	-	6,000,000	6,000,000	5,217,391	20,000,000	20,000,000	17,391,304
2	0.7561	-	10,000,000	10,000,000	7,561,437	10,000,000	10,000,000	7,561,437
3	0.6575	-	20,000,000	20,000,000	13,150,325	7,000,000	7,000,000	4,602,614
Net present value			8,929,153			12,555,355

(d) Computation of IRR