Question

11. Acompany is considering two mutually excdlusive srsjects The frec with these projects are as follows Project A ProjectS 50300 15.625 15.625 15.625 ed Initial Outlay Infiow year 1 Infiow year 2 Iniow year 3 lnfiow year 4 infiow year 5 50000 15.625 1క 100.000 The reguired rate of return on these prsjects is 10% A What is each project's NPV? Which projectis favouratle acconting to NP B. Project A's IRR is said to be 17%. Check wftether itistrue C What is Project B's RRP (Clue:Use PV formulia and sove for 15=0aE) Which project is favourable acconding to IRR2 D. What has caused the ranking conflic? E Which project should be accepted? Ep)

Answer 1

Ans A) Project B is favourable as per NPV, as Project B has higher NPV.

NPV Project A = 9231.04

NPV Project B = 12092.13

Refer below table for calculation.

	0	1	2	3	4	5
Project A	-50000	15625	15625	15625	15625	15625
PV Factorat 10%		1/1.1	1/1.1^2	1/1.1^3	1/1.1^4	1/1.1^5
PV	-50000	14204.55	12913.22	11739.29	10672.09	9701.896
NPV (Sum of PV)	9231.043
	0	1	2	3	4	5
Project B	-50000	0	0	0	0	100000
PV Factorat 10%		1/1.1	1/1.1^2	1/1.1^3	1/1.1^4	1/1.1^5
PV	-50000	0	0	0	0	62092.13
NPV (Sum of PV)	12092.13

Ans B) IRR of Project A is 16.99% or 17% so this is true if rounded off.

IRR is a point where where PV of inflows is equals to outflows or PV of Inflows minus outflow is zero.

IRR = - 50000 + 15625/ (1+r)^1 + 15625/ (1+r)^2 + 15625/ (1+r)^3 + 15625/ (1+r)^4 + 15625/ (1+r)^5 = 0

solving this equation r = 16.99%

Ans C) IRR of Project B = 14.87%

IRR of B = -50000+ 100000 / (1+r)^5 =

(1+r)^5 * 50000 = 100000 or (1+r)^5 = 2

or (1+0.1487)^5 = 2.00 or r = 14.87%

Ans D) IRR and NPV both are different medium to evaluation a project . NPV look at surpluses flows from a project , while IRR is mostly all about the rate of return getting to breakeven cash flow from a project.

Ans E) Project B should be accepted as Project has higher NPV. Higher NPV projects will create more value to the firm.

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