Question

NPV

Your division is considering two investment projects, each of which requires an up-front expenditure of $17 million. You estimate that the investments will produce the following net cash flows:

Year	Project A	Project B
1	$  6,000,000	$20,000,000
2	10,000,000	10,000,000
3	20,000,000	7,000,000

1. What are the two projects' net present values, assuming the cost of capital is 5%? Round your answers to the nearest dollar.
   Project A $  
   Project B $  
   
   What are the two projects' net present values, assuming the cost of capital is 10%? Round your answers to the nearest dollar.
   Project A $  
   Project B $  
   
   What are the two projects' net present values, assuming the cost of capital is 15%? Round your answers to the nearest dollar.
   Project A $  
   Project B $  
   
2. What are the two projects' IRRs at these same costs of capital? Round your answers to two decimal places.
   Project A     %
   Project B     %

Answer 1

a.Project A

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

• Press the CF button.
• CF0= -$17,000,000. 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 5%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 5% the cost of capital is $15,061,332.47

Project B

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

• Press the CF button.
• CF0= -$17,000,000. 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 5%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 5% the cost of capital is $17,164,777.02.

2.Project A

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

• Press the CF button.
• CF0= -$17,000,000. 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 5%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 10% the cost of capital is $11,745,304.28.

Project B

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

• Press the CF button.
• CF0= -$17,000,000. 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 10%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 10% the cost of capital is $14,705,484.60.

3.Project A

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

• Press the CF button.
• CF0= -$17,000,000. 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% the cost of capital is $8,929,152.63.

Project B

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

• Press the CF button.
• CF0= -$17,000,000. 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% the cost of capital is $12,555,354.65.

b.Project A

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

• Press the CF button.
• CF0= -$17,000,000. 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 button and CPT keys to get the IRR of the project.

The IRR is 38.77%.

Project B

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

• Press the CF button.
• CF0= -$17,000,000. 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 button and CPT keys to get the IRR of the project.

The IRR is 67.65%.

In case of any query, kindly comment on the solution