PROJECT A PROJECT B Initial Outlay -50000 -70000 Inflow year 1

PROJECT A PROJECT B

Initial Outlay -50000 -70000

Inflow year 1 12000 13000

Inflow year 2 12000 13000

Inflow year 3 12000 13000

Inflow year 4 12000 13000

Inflow year 5 12000 13000

Inflow year 6 12000 13000

(NPV, PI, and IRR calculations) You are considering two independent projects, project A and project B. The initial cash outlay associated with project A is $50000, and the initial cash outlay associated with project B is $70000. The required rate of return on both projects is 10 percent. The expected annual free cash inflows from each project are in the chart above.... Calculate the NPV, PI, and IRR for each project and indicate if the project should be accepted.

Expert Solution

Calculation of NPV, PI and IRR for project A

Year	Cashflows ($)	Discounting factor @ 10%	PV of cashflows	Discounting factor @ 11.5305%	PV pf cashflows
0	-50000	1	-50000	1	-50000
1	12000	0.909090909	10909.09091	0.896615724	10759.38869
2	12000	0.826446281	9917.355372	0.803919756	9647.037077
3	12000	0.751314801	9015.777611	0.720807094	8649.685133
4	12000	0.683013455	8196.161464	0.646286975	7755.443697
5	12000	0.620921323	7451.055877	0.579471064	6953.652765
6	12000	0.56447393	6773.687161	0.519562867	6234.754408
		NPV	2263.128394		0

NPV= Present value of cashflows from the project discounted at the required rate of return
		$2,263.13	See table

IRR= rate of return where NPV is zero. By trial and error, the IRR of the project= 11.5305%

PI= (NPV+Initial investment)/Initial investment
		(2263.13+50000)/50000
		1.0452626

Calculation of NPV, PI and IRR for project B

Year	Cashflows ($)	Discounting factor @ 10%	PV of cashflows	Discounting factor @ 3.1823%	PV pf cashflows
0	-70000	1	-70000	1	-70000
1	13000	0.909090909	11818.18182	0.96915847	12599.06011
2	13000	0.826446281	10743.80165	0.93926814	12210.48582
3	13000	0.751314801	9767.092412	0.910299673	11833.89576
4	13000	0.683013455	8879.17492	0.882224639	11468.9203
5	13000	0.620921323	8071.9772	0.855015481	11115.20125
6	13000	0.56447393	7338.161091	0.828645496	10772.39144
		NPV	-13381.61091		0

NPV= Present value of cashflows from the project discounted at the required rate of return
		($13,381.61)	See table

IRR= rate of return where NPV is zero. By trial and error, the IRR of the project= 3.1823%

PI= (NPV+Initial investment)/Initial investment
		(-13381.61+50000)/50000
		0.7323678

As the NPV of project A is positive so the same should be accepted and Project B should be rejected (as NPV is negative)

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