Question

9-16 Compute the (a) net present value, (b) internal rate of return (IRR), and (c) discounted payback period (DPB) for each of the following projects. The firm's required rate of return is 14 percent. Project Alpha $(220,000) 120,000 120,000 Project Beta $300.000 Which project(s) should be purchased if they are independent? Which project(s) should be purchased it they are mutually exclusive?

Answer 1

-270000 120000 120000 120000 14% Two Projects Alpha Beta Alpha Cash flows Discount rate Discounted cash flows Cumulative cash flows NPV of the project IRR of the project Discounted Payback -270000.00 -270000.00 105263.16 -164736.84 92336.10 -72400.74 8 0996.58 8595.84 $ 8,595.84 15.89% 2.89 -300000 -80000 555000.00 14% Beta Cash flows Discount rate Discounted cash flows Cumulative cash flows NPV of the project IRR of the project Discounted Payback -300000.00 - 300000.00 0.00 -300000.00 -61557.40 -361557.40 374609.19 13051.79 $ 13,051.79 15.53% 2.97

If they are independent both projects can be purchased as the NPV>0 , IRR> Cost of capital and Discounted payback is with in the investment horizon

If the projects are mutually exclusive, then according to NPV rule only Project Beta should be accepted as its NPV is greater than alpha's.

Formulae

F =C1619+1 =D1619+1 =E1619+1 -270000 120000 =D1621 =E1621 =C1621/(1+$B$1622)^C1619 =D1621/(1+$B$1622)^D1619 =B1624+C1623 =C1624+D1623 =E1621/(1+$B$1622)^E1619 =F1621/(1+$B$1622)^F1619 =D1624+E1623 =E1624+F1623 =NPV(B1622,D1621:F1621)+C1621 =IRR(C1621:F1621) =E1619-(E1624/F1623) 1619 Two Projects Alpha Beta 1620 Alpha 1621 Cash flows 1622 Discount rate 1623 Discounted cash flows 1624 Cumulative cash flows 1625 NPV of the project 1626 IRR of the project 1627 Discounted Payback 1628 1629 Beta 1630 Cash flows 1631 Discount rate 1632 Discounted cash flows 1633 Cumulative cash flows 1634 NPV of the project 1635 IRR of the project 1636 Discounted Payback -C1610 =D1619 =C1619 -300000 =E1619 -80000 =F1619 555000 =C1630/(1+$B$1631)^C1629 =D1630/(1+$B$1631)^D1629 =B1633+C1632 =C1633+D1632 =E1630/(1+$B$1631)^E1629 =F1630/(1+$B$1631)^F1629 =D1633+E1632 =E1633+F1632 =NPV(B1631,D1630:F1630)+C1630 =IRR(C1630:F1630) =E1629-(E1633/F1632)