In: Finance
10)
Project S costs $19,000 and its expected cash flows would be $6,000 per year for 5 years. Mutually exclusive Project L costs $41,000 and its expected cash flows would be $8,550 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend?
Select the correct answer.
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Project S | ||||||
Discount rate | 12.000% | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -19000 | 6000 | 6000 | 6000 | 6000 | 6000 |
Discounting factor | 1.000 | 1.120 | 1.254 | 1.405 | 1.574 | 1.762 |
Discounted cash flows project | -19000.000 | 5357.143 | 4783.163 | 4270.681 | 3813.108 | 3404.561 |
NPV = Sum of discounted cash flows | ||||||
NPV Project S = | 2628.66 | |||||
Where | ||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
Discounted Cashflow= | Cash flow stream/discounting factor |
Project S | ||||||
IRR is the rate at which NPV =0 | ||||||
IRR | 17.45% | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -19000.000 | 6000.000 | 6000.000 | 6000.000 | 6000.000 | 6000.000 |
Discounting factor | 1.000 | 1.174 | 1.379 | 1.620 | 1.903 | 2.235 |
Discounted cash flows project | -19000.000 | 5108.638 | 4349.696 | 3703.504 | 3153.310 | 2684.853 |
NPV = Sum of discounted cash flows | ||||||
NPV Project S = | 0.000 | |||||
Where | ||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
Discounted Cashflow= | Cash flow stream/discounting factor | |||||
IRR= | 17.45% |
Project L | ||||||
Discount rate | 12.000% | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -41000 | 8550 | 8550 | 8550 | 8550 | 8550 |
Discounting factor | 1.000 | 1.120 | 1.254 | 1.405 | 1.574 | 1.762 |
Discounted cash flows project | -41000.000 | 7633.929 | 6816.008 | 6085.721 | 5433.680 | 4851.500 |
NPV = Sum of discounted cash flows | ||||||
NPV Project L = | -10179.16 | |||||
Where | ||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
Discounted Cashflow= | Cash flow stream/discounting factor |
IRR is the rate at which NPV =0 | ||||||
IRR | 1.41% | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -41000.000 | 8550.000 | 8550.000 | 8550.000 | 8550.000 | 8550.000 |
Discounting factor | 1.000 | 1.014 | 1.028 | 1.043 | 1.058 | 1.072 |
Discounted cash flows project | -41000.000 | 8431.154 | 8313.959 | 8198.394 | 8084.434 | 7972.059 |
NPV = Sum of discounted cash flows | ||||||
NPV Project L = | 0.000 | |||||
Where | ||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
Discounted Cashflow= | Cash flow stream/discounting factor | |||||
IRR= | 1.41% |