Question

NPV Your division is considering two projects with the following cash flows (in millions): 1 3 $8 $8 $3 Project A -$17 -$26 $9 Project B $13 $10

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

FOR IRR,

The discount rate at which NPV = 0 is known as the IRR.

Answer a and Answer b)

For Project A

SUMIE X fx =D7/(1+$C$2)^D4 А Project A Discount Rate (r) 5% nm + 1] 0 171 years Cash-Outflows Cash-Inflows Net Cashflows (Inflow - Outflow) Discounted Cashflow = Net CF/ (1+r)^years -17 0 -17.00 =D7 /(1+ $C$2 ) D4

fx SUMIE X B Project A Discount Rate (1) =SUM(C8:F8) C D E F 3 17 years Cash-Outflows Cash-Inflows Net Cashflows (Inflow - Outflow) Discounted Cashflow = Net CF/ (1+r)^years 0000 -17 -17.00 7.62 7.26 7.26 2.59 NPV = sum of all discounted CF =SUM( C8:F8)

fx SUMIE X v B Project A Discount Rate (1) =IRR(C7:F7) C D E o 11 21 2 17 years T Cash-Outflows Cash-Inflows Net Cashflows (Inflow - Outflow) Discounted Cashflow = Net CF/ (1+r)^years 0000 -17 -17.00 7.62 7.26 2.59 0.47 NPV = sum of all discounted CF IRR = IRR (net CF) =IRR(C7:F7)

At WACC = 5%

0.47 NPV = sum of all discounted CF IRR = IRR (net CF) 6.68%

Completing in same way for WACC = 10% and 15%

C D Project A Discount Rate (1) 10% 1 0 17 00 years Cash-Outflows Cash-Inflows Net Cashflows (Inflow - Outflow) Discounted Cashflow = Net CF/ (1+r)^years 0000 mm -17 -17.00 7.27 6.61 2.25 -0.86 NPV = sum of all discounted CF IRR = IRR (net CF) 6.68%

Project A Discount Rate (1) 15% years Cash-Outflows Cash-Inflows Net Cashflows (Inflow - Outflow) Discounted Cashflow = Net CF/ (1+r)^years 0000 -17 -17.00 6.96 6.05 1.97 -2.02 NPV = sum of all discounted CF IRR = IRR (net CF) 6.68%

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PROJECT B

FOR WACC = 5%

Project B Discount Rate (r) 5% NM + 011 21 26 | 13 | 10 years 2 Cash-Outflows Cash-Inflows Net Cashflows (Inflow - Outflow) Discounted Cashflow = Net CF/ (1+r)^years -26 13 10 -20.00 12.38 = E7 /(1+ $C$2 )^ E4

E Project B Discount Rate () T 5 % 21 26 13 10 9 years Cash-Outflows Cash-Inflows Net Cashflows (Inflow - Outflow) Discounted Cashflow = Net CF/ (1+r)^years -26 13 10 -26.00 12.38 9.07 7.77 NPV = sum of all discounted CF =SUM( C8:58)

с D E в Project B Discount Rate (r) 5% 1 2 3 0 26 w years Cash-Outflows Cash-Inflows Net Cashflows (Inflow - Outflow) Discounted Cashflow = Net CF/(1+r)^years -26 - w 13 13 12.38 10 10 9.07 -26.00 12.38 7.77 3.23 NPV = sum of all discounted CF IRR = IRR (net CF) =IRR( C7:F7)

NPV = sum of all discounted CF	3.23
IRR = IRR (net CF)	11.96%

Completing in same way for WACC = 10% and 15%

C2 fx 10% C D E F A B Project B Discount Rate (r) 10% 0 1 2 9 years Cash-Outflows Cash-Inflows Net Cashflows (Inflow - Outflow) Discounted Cashflow = Net CF/ (1+r)^years - -26) 13 13 10 10 9 -26.00 11.82 8.26 6.76 0.84 NPV = sum of all discounted CF IRR = IRR (net CF) 11.96%

C2 fx 15% B Project B Discount Rate (r) 15% 2 years Cash-Outflows Cash-Inflows Net Cashflows (Inflow - Outflow) Discounted Cashflow = Net CF/(1+r)^years - -26| 13 -26.00 11.30 7.56 5.92 -1.22 NPV = sum of all discounted CF IRR = IRR (net CF) 11.96%

SUMMARY

Project A	WACC
	5%	10%	15%
NPV	0.47	-0.86	-2.02
IRR	6.68%	6.68%	6.68%
Project B	WACC
	5%	10%	15%
NPV	3.23	0.84	-1.22
IRR	11.96%	11.96%	11.96%

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 (11.96% > 6.68%)

WACC = 10%

Choose Project B over Project A (11.96% > 6.68%). And NPV of Project A < 0

WACC = 15%

Choose NONE of the projects as both have IRR < WACC and Negative NPV