Question

1. Use the information in the table below to answer questions a-C. Project 4 5 NPV IRR 1496 Investment 1 $1,000,000 300,000 300,000 | 400,000 $1,450,000 500,000 500,000 500,000 $2,500,000 750,000 o 0 400,000 500,000 1,000,000 0 0 58.7 14.2% 3,000,000 507.9 a. If these projects listed above are independent, which ones would be accepted if you use a 3 year payback period? b. If the projects listed above are mutually exclusive, which one would be chosen using the NPV ranking criterion if you have a cost of capital of 12%? C. Is the IRR of project C higher or lower than 15%? Why? d. If the projects listed above are independent, which ones would be accepted using the IRR rule. Assume a cost of capital of 14.1%?

Answer 1

B11 : X fr =IRR(B4:B9) E PVIF@12% A B C D Cash flows 2 Year Project A Project Project C ЗА ТВ с 4 0 $-1,000,000 $-1,450,000 $-2,500,000 1 $ 300,000 $ 500,000 $ 750,000 2 $ 300,000 $ 500,000 $ 3 $ 400,000 $ 500,000 $ 8 4 $ 400,000 $ 500,000 $ 1,000,000 9 5 $ - $ - $ 3,000,000 D 1.000 0.893 0.797 0.712 0.636 0.567 F G Present value Project A Project B AXD B xD $1,000,000 $1,450,000 $267,857 $ 446,429 $239,158 $398,597 $284,712 $355,890 $254,207| $317,759 $0 $0 H I J K Simple cumulative cash flows Project C Project A T Project B Project C CxD $2,500,000 $(1,000,000) $ (1,450,000) $ (2,500,000) $669,643 $ (700,000) $ (950,000) $ (1,750,000) $0 $ (400,000) $ (450,000) $ (1,750,000) $0 $ - $ 50,000 $ (1,750,000) $635,518 $ 400,000 $ 550,000 $ (750,000) $1,702,281 $ 400,000 $ 550,000 $ 2,250,000 11 IRR 14.04% 14.23% 17.53% NPV $45,935 $68,675 $507,442 Payback period 3.00 Years 2.90 4.25 Years Years =2+450000/500000 =4+750000/3000000 16 a) 17 b) 18 c) 19 d) Project A and Project B Project C Yes, It has highest return on investment Project B and Project C

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