Question

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Answer 1

NPV is given by:

NPV = L Rt/(1 + i) ,t varies from 1 ton where Rt = Cash flow netted (Inflow - Outflow) during the period "t" i = Discount rate t = number of periods

Now, the discount rate at which NPV = 0 is known as IRR

Answer a)

WACC = 5%

SUMIE X v fx =NPV(C1,04:0 Discount Rate 1 Year 1 nm to 00 5 % Project Project B -$11 $4 $7 $1 $$ 5.12% 15.43% =NPV(C1, C4:C6 )+ C3 -$2c $12 $5 _ IRR NPV

SUMIE - X fx =NPV(C1,04:06)+D3 NM + B C D Discount Rate 5% Year Project A Project B o $11 1 2 IRR NPV 5.12% 15.43% $0.02 =NPV(C1, 04:06 )+ D3 00

D8 A NM + @ fx =NPV(C1,04:06). co Discount Rate 5%. Year Project A Project B 이 -$11 1 1 $4 $12 2 3 $1 IRR 5.12% 15.43% NPV $0.02 $3.74 -$20 $71 $5 $9 00

WACC = 10%

SUMIE X v fx =NPV(C1,04:06)+D3 А В E Discount Rate 10% Year Project A Project B -$20 $12 2 $5 $9 IRR 5.12% 15.43% -$0.83 =NPV(C1, D4:06 )+ D3 -$11 $4 nm to 00 $7 $1 NPV

D8 - fx =NPV(C1,04:06)+D3 E В C D Discount Rate 10% Year Project A Project B $11 -$20 1 $4 $12 2. $7 $5 $1 $9 5.12% 15.43% NPV $0.83 $1.80| IRR

WACC = 15%

SUMIF ✓ fx =NPV(C1,C4:C6)+C3 A E NM C D Discount Rate 15%ī Year Project A Project B 0 -$11 $20 1 $4 $12 2 $7 $5 31 $9 IRR 5.12% 15.43% NPV =NPV(C1, C4:C6 )+ C3 $1 00

D8 fx =NPV(C1,04:06)+D3 ДА A B C DE D Discount Rate 15% Year Project Project B -$11 1 $4 $12 2. $7 -$20 $5 $9 3 $1 IRR NPV 5.12% -$1.57 15.43% $0.13)

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Answer b)

IRR will be same irrespective of WACC

WACC = 5%, 10%, 15%

SUMIF - X fx =IR в Discount Rate Year Project A IP -$11 $4 $7 $1 =IRR( C3:06)

SUMIE X fx =IRR(D3:06) в с D Discount Rate Year Project A Project B 0 -$11 -$20 1 $4 $12 - S5 21 w $9 5.12% =IRR( D3:06) IRR

C DZ AA @ fx =IRR(D3:06) B C D Discount Rate Project A Project B ol -$11 1 $4 2 Year -$20 $7 S2 59 IRR 5.12% 15.43%|

Summary

Project A	WACC
	5%	10%	15%
IRR	5.12%	5.12%	5.12%
NPV	$0.02	-$0.83	-$1.57

Project B	WACC
	5%	10%	15%
IRR	15.43%	15.43%	15.43%
NPV	$3.74	$1.80	$0.13

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Answer c)

Rule

1. Choose project whose NPV is higher ( and positive)

2. Choose project whose IRR > WACC and IRR is higher

On this basis

WACC = 5%

Choose Project B over Project A (15.43% > 5.12%) and NPV of Project B is higher.

WACC = 10%

Choose Project B over Project A (15.43% > 5.12%) . And NPV of Project A < 0

WACC = 15%

Choose Project B over Project A (15.43% > 5.12%) . And NPV of Project A < 0