Question

ABC Company is considering investing in two mutually exclusive projects, L and S. The two projects’ forecasted cash flows are shown as below. WACC is 10%.

Year 0 1 2 3 4

Project L CF ($) -1,000    700 500 200 0

Project S CF ($) -1,200 100 300 800 1,000

a. Calculate the NPVs for both projects. b. Calculate the IRRs for both projects. c. Calculate the Discounted Paybacks for both projects. [Draw a timeline] d. Based on your answers in Part a, b and c, which project(s) would you recommend for investing? Explain your answer.

Answer 1

As per Details given in the information-
NPV = PV of inflow - Outflow
Present value of inflow is calculated by excel by formula -
=PV(rate,nper,pmt,[fv],[type])
IRR is calculated by excel by formula-
=IRR(values,[guess])

Answers-

Project L
Year`	Cashflow
0	-1000
1	700
2	500
3	200
4	0
IRR	24%

Project S
Year`	Cashflow
0	-1200
1	100
2	300
3	800
4	1000
IRR	21%

Project L
Year`	Cashflow	Pv of cash flow
0	-1000	-1000.00
1	700	636.36
2	500	867.77
3	200	497.37
4	0	0.00
NPV		1001.50

Project S
Year`	Cashflow	Pv of Cash flow
0	-1200	-1200.00
1	100	89.29
2	300	239.16
3	800	569.42
4	1000	635.52
NPV		333.39

Project L
Year`	Cashflow	Pv of cash flow	Cummulative PV
0	-1000	-1000.00	-1000.00
1	700	636.36	636.36
2	500	867.77	1504.13
3	200	497.37	2001.50
4	0	0.00	2001.50

Payback Period = 1 year +{( 1000 -636.6) /867.77}
Payback period = 1.418 years

Project S
Year`	Cashflow	Pv of Cash flow	Cumulative PV
0	-1200	-1200.00	-1200
1	100	89.29	89.29
2	300	239.16	328.44
3	800	569.42	897.87
4	1000	635.52	1533.39

Payback period = 3 year + {(1200-897.87 ) / 635.52}
Payback period = 3.475 years

Note - All formulas calculated in the table is mention above

Answer d) If we have to option to invest one of these project we have to choose Project L, because its IRR, NPV and discounted payback period is more than Project S

I hope this clear your doubt.

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