Question

Cochran Corporation has a weighted average cost of capital of 11% for projects of average risk.Projects of below average risk have a cost of capital of 9% , while projects of above risk have a cost of capital   equal to 13%.Projects A and B are mutually exclusive,whereas   all other projects are independent.None of the projects will be repeated.The following table summarizes the cash flows, IRRs and risk levels of the projects.Which projects will the firm select for investment using both NPV and IRR criteria ?

Year (t)               Project A         Project B      Project C      Project D         Project E

   0                    $ -200,000           -100,000      -100,000        -100,000         -100,000

   1                          66,000               30,000         30,000            30,000            40,000

   2                          66,000               30,000         30,000           30,000            25,000

   3                          66,000               40,000         30,000            40,000            30,000

   4                          66,000               40,000         40,000            50,000            35,000

IRR                       12.110%           14.038%        10.848%        16.636%          11.630%

Project Risk           Below                 Below            Average          Above         Above

                              Average               Average                               Average        Average

Answer 1

1)	Project A:
	COC = 9.00%
	Year	Cash Flow	PVIF at 9%	PV at 9%
	0	$     -2,00,000	1	$     -2,00,000
	1	$          66,000	0.91743	$          60,550
	2	$          66,000	0.84168	$          55,551
	3	$          66,000	0.77218	$          50,964
	4	$          66,000	0.70843	$          46,756
	NPV			$          13,822
	Project B:
	COC = 9.00%
	Year	Cash Flow	PVIF at 9%	PV at 9%
	0	-100000	1	$     -1,00,000
	1	30000	0.91743	$          27,523
	2	30000	0.84168	$          25,250
	3	40000	0.77218	$          30,887
	4	40000	0.70843	$          28,337
	NPV			$          11,998
	Both projects, A & B, are acceptable as they have +ve
	NPVs and IRR's greater than COC of 9%.
	But, as they are mutually exclusive, only one can be
	selected.
	Per NPV Project A having higher NPV is to be selected.
	Per IRR, Project B having higher IRR is to be selected.
2)	Project C:
	COC = 11.00%
	Year	Cash Flow	PVIF at 11%	PV at 11%
	0	$     -1,00,000	1	$     -1,00,000
	1	$          30,000	0.90090	$          27,027
	2	$          30,000	0.81162	$          24,349
	3	$          30,000	0.73119	$          21,936
	4	$          40,000	0.65873	$          26,349
	NPV			$               -339
	To be rejected as NPV is negative.
	To be rejected as IRR is less than COC of 11%.
3)	Project D:
	COC = 13%
	Year	Cash Flow	PVIF at 13%	PV at 13%
	0	$     -1,00,000	1	$     -1,00,000
	1	$          30,000	0.88496	$          26,549
	2	$          30,000	0.78315	$          23,494
	3	$          40,000	0.69305	$          27,722
	4	$          50,000	0.61332	$          30,666
	NPV			$             8,431
	To be accepted per NPV and IRR.
4)	Project E:
	COC = 13%
	Year	Cash Flow	PVIF at 13%	PV at 13%
	0	$     -1,00,000	1	$     -1,00,000
	1	$          40,000	0.88496	$          35,398
	2	$          25,000	0.78315	$          19,579
	3	$          30,000	0.69305	$          20,792
	4	$          35,000	0.61332	$          21,466
	NPV			$           -2,765
	To be rejected per NPV and IRR.
5)	CHOICE:
	Per NPV = Projects A & D.
	Per IRR = Projects B & D.