NPV = PV of cash Inflows - PV of Cash Outflows
Project with higher NPV is better Project.
Project S:
Year | CF | PVF @9% | Disc CF |
0 | $ -1,000.00 | 1.0000 | $ -1,000.00 |
1 | $ 892.00 | 0.9174 | $ 818.35 |
2 | $ 240.00 | 0.8417 | $ 202.00 |
3 | $ 5.00 | 0.7722 | $ 3.86 |
4 | $ 5.00 | 0.7084 | $ 3.54 |
NPV | $ 27.75 |
Project L:
Year | CF | PVF @9% | Disc CF |
0 | $ -1,000.00 | 1.0000 | $ -1,000.00 |
1 | $ 5.00 | 0.9174 | $ 4.59 |
2 | $ 250.00 | 0.8417 | $ 210.42 |
3 | $ 420.00 | 0.7722 | $ 324.32 |
4 | $ 819.46 | 0.7084 | $ 580.53 |
NPV | $ 119.85 |
Hence Project L is Better.
IRR of Better Projetc:
IRR is the Rate at which PV of Cash Inflows are equal to PV of Cash Outflows.
Year | CF | PVF @9% | Disc CF | PVF @13% | Disc CF |
0 | $ -1,000.00 | 1.0000 | $ -1,000.00 | 1.0000 | $ -1,000.00 |
1 | $ 5.00 | 0.8929 | $ 4.46 | 0.8850 | $ 4.42 |
2 | $ 250.00 | 0.7972 | $ 199.30 | 0.7831 | $ 195.79 |
3 | $ 420.00 | 0.7118 | $ 298.95 | 0.6931 | $ 291.08 |
4 | $ 819.46 | 0.6355 | $ 520.78 | 0.6133 | $ 502.59 |
NPV | $ 23.49 | $ -6.12 |
IRR = Rate at which least +ve NPV + [ NPV at that rate / Change in
NPV due to 1% inc in DIsc Rate ] * 1%
= 12% + [ 23.49 / 29.61] * 1%
= 12% + 0.79%
= 12.79%
IRR of better Project is 12.79%
A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:...
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