Question

You are asked to evaluating two manually exclusive projects x and y. the cash flow for each is listed below along with the calculated npv and irr. the firm's cost of capital is 12%.

1. Calculate the NPV of each project. Which project would you accept based on NPV criterion and why?
2. What Is the IRR of each project?
3. Would you accept/reject decision change for the projects X and Y if the cost of capital increased to 18%?

Year	Cash flow x	Cash flow y
0	-350,000	-35,000
1	25,000	17,000
2	70,000	11,000
3	70,000	17,000
4	430,000	11,000

Answer 1

CF X
Discount rate	12.000%
Year	0	1	2	3	4
Cash flow stream	-350000	25000	70000	70000	430000
Discounting factor	1.000	1.120	1.254	1.405	1.574
Discounted cash flows project	-350000.000	22321.429	55803.571	49824.617	273272.774
NPV = Sum of discounted cash flows
NPV CF X =	51222.39
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

CF Y
Discount rate	12.000%
Year	0	1	2	3	4
Cash flow stream	-35000	17000	11000	17000	11000
Discounting factor	1.000	1.120	1.254	1.405	1.574
Discounted cash flows project	-35000.000	15178.571	8769.133	12100.264	6990.699
NPV = Sum of discounted cash flows
NPV CF Y =	8038.67
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Accept CF X as it has higher NPV

CF X
IRR is the rate at which NPV =0
IRR	16.57%
Year	0	1	2	3	4
Cash flow stream	-350000.000	25000.000	70000.000	70000.000	430000.000
Discounting factor	1.000	1.166	1.359	1.584	1.847
Discounted cash flows project	-350000.000	21445.876	51511.668	44188.514	232853.942
NPV = Sum of discounted cash flows
NPV CF X =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	16.57%
Accept project as IRR is more than discount rate

CF Y
IRR is the rate at which NPV =0
IRR	23.05%
Year	0	1	2	3	4
Cash flow stream	-35000.000	17000.000	11000.000	17000.000	11000.000
Discounting factor	1.000	1.231	1.514	1.863	2.293
Discounted cash flows project	-35000.000	13814.991	7264.338	9123.343	4797.328
NPV = Sum of discounted cash flows
NPV CF Y =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	23.05%

Accept CF Y as IRR is more than 18%