In: Finance
The cash flow in respect of two projects is given below. The cost of capital is 8.5%.
Year |
Project A |
Project B |
0 |
(200) |
(300) |
1 |
65 |
100 |
2 |
65 |
100 |
3 |
65 |
90 |
4 |
60 |
70 |
5 |
60 |
70 |
Answer the following question using the above information.
I What is the NPV of Project A? Should this project be accepted?
II What is the NPV of Project B? Should this project be accepted? (Please state based on what the NPV for both questions I & II are accepted or rejected)
III What is the Accounting rate of return (ARR) of Project A? Ans : 31.50%
IV What is the Accounting rate of return (ARR) of Project B? Ans : 28.67%
V What is the IRR of Project A? Use graphical and linear interpolation method. Ans : 17.67%
VI) What is the IRR for Project B? Use graphical and linear interpolation method. Ans : 14.48%
VII) What is the discounted payback period for Project A and B? Ans : A : 4 years, B:5 years
Please state all the workings clearly, pls do not answer in excel. Pls answer all manually with proper explanation and provide every formulae clearly. Tq
Project A
Years Amount Discounting Factor
Present value
1 65 0.921658986
59.9078341
2 65 0.849455287
55.21459364
3 65 0.782908098
50.8890264
4 60 0.721574284
43.29445706
5 60 0.665045423
39.9027254
Total Present value of cash inflows ( A)
249.2086366
Less : Cash outflow (B) 200
NPV (A -B) 49.21
Project A should be accepted
Discounting factor = 1 /( 1 +r)^n
r is the rate of interest
n is the no years from year 0
Project B
Years Amount Discounting Factor
Present value
1 100 0.921658986
92.16589862
2 100 0.849455287
84.94552868
3 90 0.782908098
70.46172886
4 70 0.721574284
50.5101999
5 70 0.665045423
46.55317963
Total Present value of cash inflows ( A)
344.6365357
Less : Cash outflow (B) 300
NPV (A -B) 44.64
Project B should be accepted
Accounting rate of return (ARR) = average Net profit / Average invetsment
Project A
Years Amount
1 65
2 65
3 65
4 60
5 60
Total inflows 315
Less cash outflow 200
Income 115
Years 5
Average income 23
Project B
Years Amount
1 65
2 65
3 65
4 60
5 60
Total inflows 315
Less cash outflow 200
Income 115
Years 5
Average income 23
Accounting rate of return (ARR) of Project A = 23 / 200 = 11.5%
Accounting rate of return (ARR) of Project B = 26/300 = 8.67%