Question

1. Calculate and choose project/s assuming that these two projects are

(1) mutually exclusive OR

(2) independent.

IRR (WACC 6%), specify range.

CFs Year	A	B
0	-2050	-4300
1	750	1500
2	760	1518
3	770	1536
4	780	1554

Answer 1

Dicounting rate is 6%

1.Calculation of net present value(NPV)

NPV=Present value of cash inflow and Present value of cash outflows

CFs Year	Cash flows	PVIF@6%	PV
	A	B		A	B
0	-2050	-4300	1	-2050.00	-4300.00
1	750	1500	.9434	707.55	1415.10
2	760	1518	.890	676.40	1351.02
3	770	1536	.8396	646.492	1289.626
4	780	1554	.7921	617.838	1230.923
NPV	598.28	986.669

Since the NPV of both the project is positive,however Project B has highest NPV,thus project b should be choose.

Calculation of IRR

IRR is the rate at which present value of total cash inflow is equal to total present value of cash outflows

Assume discount rate is 15% and 20%

CFs Year	Cash flows	PVIF@15	PVIF@20%	PV@15%	PV@20%
	A	B			A	B	A	B
1	750	1500	.870	.833	652.50	1305.00	624.75	1249.50
2	760	1518	.756	.694	574.56	1147.61	527.44	1053.492
3	770	1536	.658	.579	506.66	1010.69	445.83	889.334
4	780	1554	.572	.482	446.16	888.89	375.96	749.028
Total		2179.88	4352.19	1973.98	3941.354

*difference between two rates(ie 20%-15%) is 5

Project A

IRR=15+(2179.88-2050/2179.88-1973.98)*5%

=15+(129.88/205.90)*5

=15+3.154

=18.154%

Project B

IRR=15+(4352.19-4300/4352.19-3941.354)*5

=15+(52.19/410.836)*5

=15+.64

=15.64%

on the basis of IRR project A should be choose,since it has higher IRR.