Question

In: Finance

10) Project S costs $19,000 and its expected cash flows would be $6,000 per year for...

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.

a. Both Projects S and L, since both projects have IRR's > 0.
b. Project L, since the NPVL > NPVS.
c. Project S, since the NPVS > NPVL.
d. Both Projects S and L, since both projects have NPV's > 0.
e. Neither Project S nor L, since each project's NPV < 0.

Solutions

Expert Solution

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%

jeff jeffy answered 7 months ago
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