Question

Problem 10.16 a-b (Solution Video) Ivanhoe Industries is expanding its product line and its production capacity. The costs and expected cash flows of the two independent projects are given in the following table. The firm uses a discount rate of 14.82 percent for such projects Production Capacity Expansion Year Product Line Expansion $2,287,900 461,200 993,900 993,900 993,900 993,900 $7,327,100 2,583,900 2,583,900 2,583,900 3,978,100 3,978,100 4 a. What are the NPVs of the two projects? (Enter negative amounts using negative sign, e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525.) NPV of product line expansion is NPV of production capacity expansion is b. Should both projects be accepted? or either? or neither? Explain your reasoning Ivanhoe should accept Click if you would like to Show Work for this question: Open Show Work

Answer 1

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Answer a)		Computation of NPV of the projects
			i	ii		iii		iv=i*iii	v=ii*iii
		Year	Project Line expansion	Project capacity expansion		PVIF @ 14.82%		Present value of Project Line expansion	Present value of Project capacity expansion
		0	-2287900	-7327100		1.0000		$        (2,287,900)	$         (7,327,100)
		1	461200	2583900		0.8709		$             401,672	$           2,250,392
		2	993900	2583900		0.7585		$             753,889	$           1,959,930
		3	993900	2583900		0.6606		$             656,584	$           1,706,959
		4	993900	3978100		0.5753		$             571,837	$           2,288,788
		5	993900	3978100		0.5011		$             498,029	$           1,993,370
		Total = NPV =						$             594,112	$           2,872,339
		NPV of project line expansion			$    594,112
		NPV of project capacity expansion			$ 2,872,339
Answer b)		Ivanhoe should accepted both the project as projects are independent and both has positive NPV at required rate of 14.82%