Question

In: Finance

The cash flow in respect of two projects is given below. The cost of capital is...

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

Solutions

Expert Solution

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%


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