Question

In: Finance

Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the...

Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for both projects is 7 percent.

Year Dry Prepreg Solvent Prepreg
0 –$ 1,870,000 –$ 835,000
1 1,117,000 460,000
2 934,000 770,000
3 767,000 424,000

  

a.

What is the payback period for both projects? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

b.

What is the NPV for both projects? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

c.

What is the IRR for both projects? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

d.

Calculate the incremental IRR for the cash flows. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Solutions

Expert Solution

a
Dry
Year Cash flow stream Cumulative cash flow
0 -1870000 -1870000
1 1117000 -753000
2 934000 181000
3 767000 948000
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 1 and 2
therefore by interpolation payback period = 1 + (0-(-753000))/(181000-(-753000))
1.81 Years
Solvent
Year Cash flow stream Cumulative cash flow
0 -835000 -835000
1 460000 -375000
2 770000 395000
3 424000 819000
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 1 and 2
therefore by interpolation payback period = 1 + (0-(-375000))/(395000-(-375000))
1.49 Years
b
Dry
Discount rate 0.07
Year 0 1 2 3
Cash flow stream -1870000 1117000 934000 767000
Discounting factor 1 1.07 1.1449 1.225043
Discounted cash flows project -1870000 1043925 815791.8 626100.5
NPV = Sum of discounted cash flows
NPV Dry = 615817.48
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Solvent
Discount rate 0.07
Year 0 1 2 3
Cash flow stream -835000 460000 770000 424000
Discounting factor 1 1.07 1.1449 1.225043
Discounted cash flows project -835000 429906.5 672547.8 346110.3
NPV = Sum of discounted cash flows
NPV Solvent = 613564.66
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
c
Dry
IRR is the rate at which NPV =0
IRR 0.255416709
Year 0 1 2 3
Cash flow stream -1870000 1117000 934000 767000
Discounting factor 1 1.255417 1.576071 1.978626
Discounted cash flows project -1870000 889744.4 592612.9 387642.7
NPV = Sum of discounted cash flows
NPV Dry = 1.76951E-08
Where
Discounting factor = (1 + IRR)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
IRR= 25.54%
Solvent
IRR is the rate at which NPV =0
IRR 0.43785288
Year 0 1 2 3
Cash flow stream -835000 460000 770000 424000
Discounting factor 1 1.437853 2.067421 2.972647
Discounted cash flows project -835000 319921.5 372444.7 142633.8
NPV = Sum of discounted cash flows
NPV Solvent = 0.000909718
Where
Discounting factor = (1 + IRR)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
IRR= 43.79%
d
Solvent-Dry Cash flow values are as follows
Year Cash flow stream
0 1035000
1 -657000
2 -164000
3 -343000
Incremental IRR is calculated based on difference of the cash flow of the two projects
Incremental CF
IRR is the rate at which NPV =0
IRR 0.071387783
Year 0 1 2 3
Cash flow stream 1035000 -657000 -164000 -343000
Discounting factor 1 1.071388 1.147872 1.229816
Discounted cash flows project 1035000 -613223 -142873 -278904
NPV = Sum of discounted cash flows
NPV Incremental CF = -5.22123E-08
Where
Discounting factor = (1 + IRR)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
IRR= 7.14%

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