Question

3. Your division is considering two investment projects, each of which requires an up-front expenditure of $25 million. You estimate that the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars): Year Project A Project B 20 10 10 15 20 (1) What are the payback periods for the two projects? (2) What are the IRRs of the two projects? (3) If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake? (4) If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake?

Answer 1

Eualuatiam rgject A ntal nuastmomt Cean O Cash autlaus) $ 25, Ooo.000 ) XInual Cahflaus s Caskaus ( Cost of Captal ear Year Cashlaws Gumulatua Cashflaus Gresamt alua (in $) C 5 S.o0o 000 L1+.05) S.000.000 4.761. 9oS 5.000.000 0,00.0,000 1o ,000,000 IS, 000,00o 9.070, 29S IS, 000.00o Is 000,000 30,000 00o 12 957 564 20.000, 0 00 20.000,000 So, 000,00O 16.454,05 Preramt alua of ual Cashflaus 3. 243.814

resamt Valua IS C1+.IS) 4,347 826 t0,000,00o 2. 7 S61.437 L4.15) S.O00, 0OO 9862 743 20,000,00 O 1L435,065 33.207 07

lalaackYea bane Untacausred Cast at the Staet a the Calaus dusing la) Periad 2 25,000,000 IS,OOO OO0 2.67 tear's

2) Calculaliam a, IRR Cusing rial &rar Mathad) lalauar Role) Highan 147,900 NPu 28. is -387,096 277. is Rata వయి N at lauas Rate NPu at dewer Rate IRR = X + Rate NP at in Rate Higher Rata x28-27) 27 147 900 147900-(-387,096) CRaumdsd to 2 TRR 27.28 1.

Net Basant Value lOs) til ruestm unt Bassent Valas ruad Castlaus $43, 243.814 2 S,o00 N Pv 18. 243 814 C@IST) Briasemt Volue of Inmuad Coshflaus mtial Iruetmenmt s 25, 000,000 33. 207.07 NPv 8, 2.07, 071

Ct Date: Page no: ntial nutmamt Year o Cash alaus) 2S. 00o. O00 amual Castflauss 2) (1+ Cost f Coptol Year Cashflauss Glate Castflous s 20000 00o Cit.os) 1 20,000, 000 19, 04 7, 619 20,000,000 ro.0o0.00 6 2 Ci+os 8000.000 10,000,00o 9,670, 295 6.910 701 30,000,000 8.000.000 38,000, 00O 6.000.00o 4 6,000.000 44.000,000 4,936 215 Pv Dnmual Cashllauss 39.96.830 of

Brssarst alue S 20,0000oo .IS 7 391,304 16,000 000 7561437 2 8.000.000 S.260,130 6.000.000 3.430, 520 - 33.6433091

Paleaek leriad leaa tUnracanrad Cast at the Pha Year Start af Poriad ull Recutry the Year Catfdans duing 25.000 000-20,0oo.000 10.000,00o 1.So

2) Calculalianm a RR athad) rial errar Cusing (వ Rవే) NPV 36 is 46.657 259, 1 |0 Highar Rate) NPv 37is N at lower Rata NPu at lauun Rate Dilfaremes in Rat IRR = Rote (37-36) 6.657 + 36 46.657-(-259.110) 36.15 1 TRR =

Date: Page no: 3) NPV Cesr) Cresant alue mual Cahllauw's Initial mestment 39, 964.830 $ ।५, ७6५, १ 3 ० 2s.000 000 IS.) NPV of Bnual Catauss-tl nuetmnt NPv 25 000 00o 33 643 391 8643 391 1 NPV +

aylack Perad 2.67 27.281 (2) IRR 36.151 (3) 9 es capial Mutually culis and Cast are is lrgicet rajict A NPv (es) 18,213.814 $14,964.8.30 irm Shauld Undestolka Prt A bacausa it NP is Higha Mutually Exalins amd Caut af ure Capital is IS . Prayiest NPv 8.207.0 8.643,391 firm Shauld NPV Undantaka Crosact B becaisa its is Highes