Question

Problem 10-7 NPV 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 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 $ 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 $ 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 $ What are the two projects' IRRs at these same costs of capital? Round your answers to two decimal places. Project A % Project B %

Please show all work/calculations!

Answer 1

Project A
Discount rate	5.000%
Year	0	1	2	3
Cash flow stream	-17000000	6000000	10000000	20000000
Discounting factor	1.000	1.050	1.103	1.158
Discounted cash flows project	-17000000.000	5714285.714	9070294.785	17276751.971
NPV = Sum of discounted cash flows
NPV Project A =	15061332.47
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Project B
Discount rate	5.000%
Year	0	1	2	3
Cash flow stream	-17000000	20000000	10000000	7000000
Discounting factor	1.000	1.050	1.103	1.158
Discounted cash flows project	-17000000.000	19047619.048	9070294.785	6046863.190
NPV = Sum of discounted cash flows
NPV Project B =	17164777.02
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Project A
Discount rate	10.000%
Year	0	1	2	3
Cash flow stream	-17000000	6000000	10000000	20000000
Discounting factor	1.000	1.100	1.210	1.331
Discounted cash flows project	-17000000.000	5454545.455	8264462.810	15026296.018
NPV = Sum of discounted cash flows
NPV Project A =	11745304.28
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Project B
Discount rate	10.000%
Year	0	1	2	3
Cash flow stream	-17000000	20000000	10000000	7000000
Discounting factor	1.000	1.100	1.210	1.331
Discounted cash flows project	-17000000.000	18181818.182	8264462.810	5259203.606
NPV = Sum of discounted cash flows
NPV Project B =	14705484.60
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Project A
Discount rate	15.000%
Year	0	1	2	3
Cash flow stream	-17000000	6000000	10000000	20000000
Discounting factor	1.000	1.150	1.323	1.521
Discounted cash flows project	-17000000.000	5217391.304	7561436.673	13150324.649
NPV = Sum of discounted cash flows
NPV Project A =	8929152.63
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Project B
Discount rate	15.000%
Year	0	1	2	3
Cash flow stream	-17000000	20000000	10000000	7000000
Discounting factor	1.000	1.150	1.323	1.521
Discounted cash flows project	-17000000.000	17391304.348	7561436.673	4602613.627
NPV = Sum of discounted cash flows
NPV Project B =	12555354.65
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Project A
IRR is the rate at which NPV =0
IRR	38.77%
Year	0	1	2	3
Cash flow stream	-17000000.000	6000000.000	10000000.000	20000000.000
Discounting factor	1.000	1.388	1.926	2.672
Discounted cash flows project	-17000000.000	4323613.781	5192676.702	7483709.517
NPV = Sum of discounted cash flows
NPV Project A =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	38.77%

Project B
IRR is the rate at which NPV =0
IRR	67.46%
Year	0	1	2	3
Cash flow stream	-17000000.000	20000000.000	10000000.000	7000000.000
Discounting factor	1.000	1.675	2.804	4.696
Discounted cash flows project	-17000000.000	11943285.351	3566051.625	1490663.025
NPV = Sum of discounted cash flows
NPV Project B =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor