Question

In: Finance

Question 1 has already been answered. Please answer question 2 below the table only. Find out...

Question 1 has already been answered. Please answer question 2 below the table only.

  1. Find out the NPV, IRR and Payback period for each of the following three projects.

Assume I=6%.                       

                                                                                                            (60 points)

Project

CF0

CF1

CF2

CF3

CF4

CF5

A

-12,000

3000

3000

4000

4000

1000

B

-12,000

4000

4000

3000

3000

1000

C

-12,000

3000

3000

3000

3000

1000

D

-12,000

5000

3000

5000

3000

0

E

-12,000

3000

3000

3000

3000

5000

F

-12,000

0

0

6000

6000

6000

  1. Using the above projects (proper explanation is required)                                                                                                                                                                        (40 points)
  1. Which of the above projects would you invest in? Why?
  2. If you have only $12,000 which one of the projects would you invest in? Why?
  3. If you have only $24,000 which of the projects would you invest in? Why?
  4. If you have only $36,000 which of the projects would you invest in? Why?

Solutions

Expert Solution

Calculation of NPV of project
Year Discount Factor @ 6% Project A Project B Project C Project D Project E Project F
Cash flow Present value Cash flow Present value Cash flow Present value Cash flow Present value Cash flow Present value Cash flow Present value
0                 1.00000 -$12,000.00 -$12,000.00 -$12,000.00 -$12,000.00 -$12,000.00 -$12,000.00 -$12,000.00 -$12,000.00 -$12,000.00 -$12,000.00 -$12,000.00 -$12,000.00
1                 0.94340 $3,000.00 $2,830.19 $4,000.00 $3,773.58 $3,000.00 $2,830.19 $5,000.00 $4,716.98 $3,000.00 $2,830.19 $0.00 $0.00
2                 0.89000 $3,000.00 $2,669.99 $4,000.00 $3,559.99 $3,000.00 $2,669.99 $3,000.00 $2,669.99 $3,000.00 $2,669.99 $0.00 $0.00
3                 0.83962 $4,000.00 $3,358.48 $3,000.00 $2,518.86 $3,000.00 $2,518.86 $5,000.00 $4,198.10 $3,000.00 $2,518.86 $6,000.00 $5,037.72
4                 0.79209 $4,000.00 $3,168.37 $3,000.00 $2,376.28 $3,000.00 $2,376.28 $3,000.00 $2,376.28 $3,000.00 $2,376.28 $6,000.00 $4,752.56
5                 0.74726 $1,000.00 $747.26 $1,000.00 $747.26 $1,000.00 $747.26 $0.00 $0.00 $5,000.00 $3,736.29 $6,000.00 $4,483.55
NPV $774.29 $975.97 -$857.42 $1,961.35 $2,131.61 $2,273.83
Project NPV
A $774.29
B $975.97
C -$857.42
D $1,961.35
E $2,131.61
F $2,273.83
Answer a
I will invest in Projects A,B,D,E and F as these projects have positive NPV.
Answer B
I will invest in Project F as it has highest NPV compared to other projects.
Answer C
I will invest in Project E and F as these combination will give highest NPV.
Answer D
I will invest in Project D,E and F as these combination will give highest NPV.

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