Question

 

Problem 1:

As the financial manager of the firm, you are given 6 future projects with their expected cost and yearly profits.

Year	Project A	Project B	Project C	Project D	Project E
0	-$500,000.00	-$400,000.00	-$300,000.00	-$200,000.00	-$100,000.00
1	$135,000.00	$112,500.00	$90,000.00	$57,500.00	$30,000.00
2	$145,000.00	$125,000.00	$90,000.00	$62,500.00	$32,000.00
3	$155,000.00	$130,000.00	$90,000.00	$67,500.00	$34,000.00
4	$165,000.00	$135,000.00	$90,000.00	$70,000.00	$36,000.00
5	$175,000.00	$140,000.00	$90,000.00	$72,500.00	$38,000.00

1. Calculate the NPV for each project if the company has a 10% discount rate
2. Calculate the IRR for each project if you can finance and reinvest at 10%
3. Your firm has a budget constraint of $800,000. Based on this constraint, which projects should the company implement?

Answer 1

Using excel formula to calculate NPV and IRR

		A	B	C	D	E
	Year	Project A	Project B	Project C	Project D	Project E
1	0	($500,000.00)	($400,000.00)	($300,000.00)	($200,000.00)	($100,000.00)
2	1	$135,000.00	$112,500.00	$90,000.00	$57,500.00	$30,000.00
3	2	$145,000.00	$125,000.00	$90,000.00	$62,500.00	$32,000.00
4	3	$155,000.00	$130,000.00	$90,000.00	$67,500.00	$34,000.00
5	4	$165,000.00	$135,000.00	$90,000.00	$70,000.00	$36,000.00
6	5	$175,000.00	$140,000.00	$90,000.00	$72,500.00	$38,000.00
	NPV	$80,374.23	$82,385.24	$41,170.81	$47,467.11	$27,447.21
	EXCEL FORMULA	A1+NPV(0.1,A2:A6)	B1+NPV(0.1,B2:B6)	C1+NPV(0.1,C2:C6)	D1+NPV(0.1,D2:D6)	E1+NPV(0.1,A2:A6)
	IRR	15.83%	17.47%	15.24%	18.53%	19.80%
	EXCEL FORMULA	IRR(A1:A6)	IRR(B1:B6)	IRR(C1:C6)	IRR(D1:D6)	IRR(E1:E6)

C. Based on NPV projects should be selected. Selecting Project B,D and E would give highest NPV