Question

The three projects below are mutually exclusive and completely essential for your firm's existence. Your firm MUST invest in one (and only one) of them. You have been charged with analyzing the projects and making a recommendation for which to pursue. You should complete the indicated computations for each project then write a short analysis and conclusion in the text box below. Make sure to clearly indicate which project you think the firm should accept. You should assume the cash flow forecast is accurate (at least as accurate as possible). In addition, the projects all have similar risk. If any additional computations (beyond those indicated) are required, you should perform them, then explain the reason they are necessary in your analysis. hurdle rate 8.00% Time A os (1000 Essays Hedging Project B $(100 0 Options 110 WACC Ian Anni Tools Short Answer Valuation

You can only invest in one of the projects

Answer 1

A В E 1 2 Project A: Cash flow PV factor @8% |Present value Time -100000 0 1 -100000 32500 5 0.9259 30092.59 6 0.8573 2 32500 27863.51 7 3 32500 0.7938 25799.55 0.7350 4 32500 23888.47 IRR 11.39% NPV 9 7644.12 10 Payback period 3 + 2500/32500 = 3.0769 years. 11 12 13 Project B: Cash flow PV factor @8% Present value Time 14 15 0 -100000 1 -100000 16 1 20000 0.9259 18518.52 17 2 30000 0.8573 25720.16 40000 44000 11.25% NPV 18 31753.29 0.7938 19 4 0.7350 32341.31 IRR 20 8333.29 21 Payback period = 310000/44000 3.2273 years st 223

A В C D E F Project C: Time 24 Cash flow PV factor @8% Present value 25 26 0 -100000 -100000 27 50000 0.9259 46296.30 28 2 35000 0.8573 30006.86 29 0.7938 25000 19845.81 30 15000 0.7350 11025.45 IRR 11.93% NPV 31 7174.41 32 Payback period= 2 + 15000/25000 2.60 years 33 34 Project D Time 35 Cash flow PV factor @8% |Present value -40000 12500.00 36 37 -40000 1 38 13500 0.9259 39 2 13500 0.8573 11574.07 10716.74 40 3 13500 0.7938 41 4 13500 0.7350 9922.90 IRR 13.19% |NPV 42 4713.71 43 Payback period 3 + 9500/13500 = 3.7037 years 44 45 46 The firm should accept Project C. 47 Project C has less payback period compared to other projects. Project C has better NPV and IRR. 48 49

EXCEL FORMULA:

A В C D E 1 2 Project A: Time PV factor @8% = 1/(1+8% )^B4 =1/(1+8%)AB5 =1/(1+8%)^B6 =1/(1+8%)^B7 =1/(1+8%)AB8 NPV Cash flow -100000 Present value 3 C4*D4 0 5 C5* D5 32500 2 32500 32500 C6* D6 6 7 C7*D7 32500 C8* D8 4 -IRR(C4:C8) =SUM(E4:E8) IRR 9 10 3 2500/32500 3.0769 years Payback period 11 12 13 Project B: Time 0 1 2 Cash flow -100000 20000 PV factor @8% 1/(1+8% )^B15 =1/(1+8% )AB16 1/(1+8% )AB17 -1/(1+8% ) ^B18 - 1/ (1+8% )AB19 NPV 14 Present value -C15*D15 -C16*D16 15 16 17 C17* D17 30000 -C18*D18 -C19* D19 -SUM(E15: E19) 40000 18 4 IRR 44000 19 | =IRR(C15:C19) 20 21 4

A В D E Project C: Cash flow PV factor @8% Present value C26* D26 C27* D27 -C28*D28 C29* D29 C30* D30 -SUM(E26:E30) Time 25 - 1 / (1+8% )AB26 - 1 / (1+8% )AB27 - 1 / (1+8% )AB28 - 1/ (1+8% )AB29 1/(1+8% )AB30 -100000 50000 35000 25000 26 0 27 1 28 2 29 3 30 4 15000 =IRR(C26:C30) 31 IRR NPV 32 Payback period 2 15000/25000 2.60 years 33 34 35 Project D: Time Cash flow -40000 PV factor @8% Present value 36 1/(1+8% )AB37 1/(1+8% )AB38 1/(1+8% )AB39 1/(1+8% )AB40 - 1/ (1+8% )AB41 NPV 37 C37*D37 0 38 -С38*D38 1 13500 39 C39* D39 2 13500 -C40* D40 -C41*D41 =SUM(E37:E41) 40 3 13500 41 13500 4 - IRR (C37:C41) 42 IRR 43