Question

Bausch Company is presented with the following two mutually exclusive projects. The required return for both projects is 17 percent. Project N Year Project M -$145,000 -$360,000 64,000 82,000 73,000 59,000 0 1 150,000 185,000 135,000 115,000 2 3 4 a. What is the IRR for each project? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) c. Which, if either, of the projects should the company accept? a. Project M Project N b. Project M Project N c. Accept project

Answer 1

a.Project M

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$145,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the required rate of return of 17%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 17% required rate of return is $46,667.37.

Project N

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$360,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the required rate of return of 17%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 17% required rate of return is $49,009.92

b.Project M

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$145,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 35.73%.

Project N

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$360,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 24.12%.

c.Project N should be accepted since it has the highest net present value.

In case of any query, kindly comment on the solution.