Question

Suppose you are working in the financial management team at Madison Square Garden and need to compare two capital projects to identify a better one.

●Project 1 (upgrading seats) has an expected useful life of 10 years and anticipated annual cash flows of $90,000. The initial cost is $520,000.

●Project 2 (replacing scoreboard) has an expected useful life of 7 years and anticipated annual cash flows of $80,000. The initial cost is $250,000.

●Your organization will use bank loan with 10% annual interest rate.

Q1. Use methods of NPV and IRR and identify which of projects should be accepted

Q2. What would happen if annual interest rate is 13% and 15%?

Answer 1

C F G H J K L M N O Year WN PV Factor@10% Project 1 PV of Project 1 Project 2 PV of Project 2 11 $-5,20,000.00 $-5,20,000.00 $-2,50,000.00 $ -2,50,000.00 0.909090909 $ 90,000.00 $ 81,818.18 $ 80,000.00 $ 72,727.27 0.826446281 $ 90,000.00 $ 74,380.17 $ 80,000.00 $ 66,115.70 0.751314801 $ 90,000.00 $ 67,618.33 $ 80,000.00 $ 60,105.18 0.683013455 $ 90,000.00 $ 61,471.21 $ 80,000.00 $ 54,641.08 0.620921323 $ 90,000.00 $ 55,882.92 $ 80,000.00 $ 49,673.71 0.56447393 $ 90,000.00 $ 50,802.65 $ 80,000.00 $ 45,157.91 0.513158118 $ 90,000.00 $ 46,184.23 $ 80,000.00 $ 41,052.65 0.46650738 $ 90,000.00 $ 41,985.66 0.424097618 $ 90,000.00 $ 38,168.79 0.385543289 $ 90,000.00 $ 34,698.90 Total (NPV) $ 33,011.04 $ 1,39,473.51 Year PV Factor@13% Project 1 PV of Project 1 Project 2 PV of Project 2 1 $-5,20,000.00 $ -5,20,000.00 $ -2,50,000.00 $ -2,50,000.00 | 0.884955752 $ 90,000.00 $ 79,646.02 $ 80,000.00 $ 70,796.46 0.783146683 $ 90,000.00 $ 70,483.20 $ 80,000.00 $ 62,651.73 0.693050162 $ 90,000.00 $ 62,374.51 $ 80,000.00 $ 55,444.01 0.613318728 $ 90,000.00 $ 55,198.69 $ 80,000.00 $ 49,065.50 0.542759936 $ 90,000.00 $ 48,848.39 $ 80,000.00 $ 43,420.79 0.4803185271 $ 90,000.00 $ 43,228.67 $ 80,000.00 $ 38,425.48 0.425060644 $ 90,000.00 $ 38,255.46 $ 80,000.00 $ 34,004.85 0.376159862 $ 90,000.00 $ 33,854.39 0.332884833 $ 90,000.00 $ 29,959.64 0.294588348 $ 90,000.00 $ 26,512.95 Total (NPV) $ -31,638.09 $ 1,03,808.83 colo covou Since project have unequal life we will have to Equalise it by dividing the sum of PV factor till the life of project Project 1 Project 2 NPV $ 33,011.04 $ 1,39,473.51 TOTAL of PVF 6.144567106 4.868418818 Equalised NPV $ 5,372.39 $ 28,648.63 Project 2 should be selected. Since project have unequal life we will have to Equalise it by dividing the sum of PV factor till the life of project Project 1 Project 2 NPV $ -31,638.09 $ 1,03,808.83 TOTAL of PVF 5.426243476 4.422610433 Equalised NPV $ -5,830.57 $ 23,472.30 Project 2 should be selected. IRR 11% 25% IRR will remain same in All

Year PV Factor@15% Project 1 PV of Project 1 Project 2 PV of Project 2 11 $-5,20,000.00 $-5,20,000.00 $-2,50,000.00 $ -2,50,000.00 0.869565217) $ 90,000.00 $ 78,260.87 | $ 80,000.00 $ 69,565.22 0.7561436671 $ 90,000.00 $ 68,052.93 $ 80,000.00 $ 60,491.49 0.6575162321 $ 90,000.00 $ 59,176.46 $ 80,000.00 $ 52,601.30 0.571753246 $ 90,000.00 $ 51,457.79$ 80,000.00 $ 45,740.26 0.497176735 $ 90,000.00 $ 44,745.91 $ 80,000.00 $ 39,774.14 0.432327596 $ 90,000.00 $ 38,909.48 $ 80,000.00 $ 34,586.21 0.37593704 $ 90,000.00 $ 33,834.33 $ 80,000.00 $ 30,074.96 0.326901774 $ 90,000.00 $ 29,421.16 0.284262412 $ 90,000.00 $ 25,583.62 0.247184706 $ 90,000.00 $ 22,246.62 Total (NPV) $ -68,310.82 $ 82,833.58 101 Since project have unequal life we will have to Equalise it by dividing the sum of PV factor till the life of project Project 1 Project 2 NPV $ -68,310.82 $ 82,833.58 TOTAL of PVF 5.018768626 4.160419734 Equalised NPV $ -13,611.07 $ 19,909.91 Project 2 should be selected.

Year OMN00 PV Factor@10% =1/1.1^B3 =1/1.1^B4 =1/1.1^B5 =1/1.1^B6 =1/1.1^B7 =1/1.1^B8 =1/1.1^B9 =1/1.1^B10 =1/1.1^B11 =1/1.1^B12 =1/1.1^B13 Project 1 -520000 90000 90000 90000 90000 90000 90000 90000 90000 90000 90000 Total (NPV) PV of Project 1 =C3*D3 =C4*D4 =C5*D5 =C6*D6 =C7*D7 =C8%D8 =C9*D9 =C10*D10 =C11*D11 =C12*D12 =C13*D13 =SUM(E3:E13) Project 2 -250000 80000 80000 80000 80000 80000 80000 80000 PV of Project 2 =C3*F3 =C4*F4 =C5*F5 =C6*F6 =C7*F7 =C8*F8 =C9*F9 =C10*F10 =SUM(G3:G13) NPV TOTAL of PVF Equalised NPV Since project have unequal life we will have to Equalise it by dividing the sum of PV factor till the life of project Project 1 Project 2 =E14 =G14 =SUM(C4:C13) =SUM(C4:C10) =D19/D20 =E19/E20 Project 2 should be selected. IRR =IRR(D3:D13) =IRR(F3:F13) IRR will remain same in All