Question

For each of the following projects determine the NPV of each one (provide your answer), and rank them. Then, determine which of the following projects should a firm undertake if it can invest $25000. Please use a WACC of 11%. Turn your answer in to the drop folder provided. You will receive 1 point for the correct NPV, Ranking and Recommendation. Year ON Project A Project B Project C -9000 -12000 -18200 1 2000 50000 5000 4000 5000 1000 6000 10000 4000 2000 12000

Correct answers and spelling for thumbs up!

Answer 1

Let cash flows in Year n be denoted by CFn

NPV = ΣCFn/(1+r)ⁿ

WACC = r = 11%

For Project A, NPV = -CF0 + CF1/(1+r) + CF2/(1+r)² + CF3/(1+r)³ + CF4/(1+r)⁴
= -9000 + 2000/(1+0.11) + 5000/(1+0.11)² + 1000/(1+0.11)³ + 4000/(1+0.11)⁴
= $226.02

For Project B, NPV = -CF0 + CF1/(1+r) + CF2/(1+r)² + CF3/(1+r)³ + CF4/(1+r)⁴
= -12000 + 5000/(1+0.11) + 4000/(1+0.11)² + 6000/(1+0.11)³ + 2000/(1+0.11)⁴
= $1455.60

For Project C, NPV = -CF0 + CF1/(1+r) + CF2/(1+r)² + CF3/(1+r)³ + CF4/(1+r)⁴
= -18200 + 0/(1+0.11) + 5000/(1+0.11)² + 10000/(1+0.11)³ + 12000/(1+0.11)⁴
= $1074.80

Ranking in Terms on NPV --> Project B > Project C > Project A

Since the firm has $25000, it can select A or B or C individually or A and B together

NPV of A = $226.02
NPV of B = $1455.60
NPV of C = $1075.80
NPV of A and B = 226.02 + 1455.60 = $1681.62

Hence, the firm should select A and B