Question

Crane Corp. management is evaluating two mutually exclusive projects. The cost of capital is 15 percent. Costs and cash flows for each project are given in the following table. Year Project 1 Project 2 0 -$1,266,016 -$1,209,606 1 263,000 345,000 2 358,000 345,000 3 416,000 345,000 4 547,000 345,000 5 721,000 345,000 Calculate NPV and IRR of two projects. (Enter negative amounts using negative sign, e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525. Round IRR answers to 2 decimal places, e.g. 15.25 or 12.25%.) NPV of project 1 is $ NPV of project 2 is $ IRR of project 1 is % IRR of project 2 is % Which project should be accepted? Crane Corp. should accept

Answer 1

Project 1

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$1,266,016. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the cost of capital of 15%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 15% cost of capital is $178,119.29.

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$20. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 19.88%

Project 2

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the cost of capital of 15%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 15% cost of capital is -$53,112.49.

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$20. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 13.13%

Crane Corp should accept Project 1 since it has the highest net present value.

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