Question

7. Citicorp Inc. is considering two independent projects that can increase the revenue and generate more market share with the following cash flows. The required return for both projects is 16 percent. (20 marks) Project B -$135,000 Project A -$125,000 Year 0 46,000 50,000 2 79,000 30,000 51,000 110,000 iWhat are the NPVS at both Project A and Project B? (8 marks) ii) What are the IRR8 at both Project A and Project B? (8 marks) i) Which project(s) will you accept for independent project or mutually exclusive project (4 marks)

Please do not use Excel to solve this problem, using financial calculator and show steps.

Answer 1

- (Required Return 16. gate 1 Page no: _ ( Initia Inuestment 1 tear Initial year Cash flaue - $ 125.000 - a year oa cash outflowe) 2) Annual Cashflau Pu: Cashflaw (lt Recquired Rote / Retencer year Cashflaus Present Value ore @16-7 4262000 (it .16) 790002 46.000 79.000 51,ooo 39,655 58.710 32.673 17:16 $1.000 7.76 Pv Inuestment Total Insual Cashflow = 131,038 NPr - Present Value of - Iritid Annual Cashflane = 131,038 - 125.000 NPV = $ 6,038 1) IRR (Calculation of RR by bria A Ererar ) NPV @ 18% is NPV @ 19% is $ $16,760 $ - $293 ( Lower h Higher Rate) Rote )

formula IRR - Difference in Rate Lauer & NPv at Rate Npv at Lower Rote Lover Rate & - NPV at a Higher Rate = 18 + x (19-18) 1760 - 1760 - (- 293) IRR 18.86 6.

Project B (Required Retion = 16.6.) BELLE- 1. Initial Investment = - $ 135.000 Year o Cash-outhlaw ) 2) Annual Cashflau P = Cashflang Year Cashflau (im & Present Value Year C (l+ Recquired Return) @ 16.1. So.000 (t.16) so. ooo 30.ooo 11oooo 43. 103 22.295 70. 472 30.000 OT7.16 110.000 C +.16 - $ 135, 870 - Present Salue Annual of Caskflau Pr - Present Value of - Iritid Inuestment NPV = 135, 870 - 1.35.ooo NPV = $ 870 i) IRR (By brid s errar Methad) NPV @ 16%. is $870 ( Lower Rate) NPV @ 17% is - $ 1669 Higher Rate /

ii) IRR = Lower Rate Difference in & NPV cat Lower Rate & NPV at - NPV at Lamer Rate Higher Rate Rote = 16 + X (17-16) 870 870 - (-1669) IRR 16.34 1.

(ii) Of Projects are Independent than a) Yes. We should accept project A because It's NPV is Positive and its IRR is also Higher than the Recquired Rote of Return (161) b) yees. We Should accept Project B because It's NP is Positive ($870) and its IRR is also Higher (16.34%) as Campare To Recquired Rate of Return (16%).

(i) T If Poojects are Project $ 6,038 18.864. Mutually Exclusive I Project B $ 8.70 NPV IRR 16.34% We should select Project A because its NPV and IRR are Higher than the Project B NPV & IRR