Question

(NPV, PI, and IRR calculations) You are considering two independent projects, project A and project B. The initial cash outlay associated with project A is $50,000 and the initial cash outlay associated with project B is $70,000. The required rate of return on both projects is 11 percent. The expected annual free cash inflows from each project are on the table below. Calculate the NPV, PI, and IRR for each project and indicate if the project should be accepted.

	Project A	Project B
Initial Outlay	-$50,000	-$70,000
Inflow year 1	17,000	18,000
Inflow year 2	17,000	18,000
Inflow year 3	17,000	18,000
Inflow year 4	17,000	18,000
inflow year 5	17,000	18,000
inflow year 6	17,000	18,000

Calculate the NPV, PI, and IRR for each project and indicate if the project should be accepted.

Answer 1

ܐ ܐ mu ܗ ܩ ܘ (26=27.1.(Albume) Project - A In Project -B a) NPV b) PI - Av of Inflowsta) NPU CF'S OF QIL/ Yr PVOG DOF'S. or Cash Outlay Cf's P2 = Pu q Irflow Pvg, Def's. DF @17 17,000 0.9009 15,315:30 18 pod 0-9009 16,316.20 outlay. 17,OOD 0.8116 13,797.20 = 71,918.50 18,000 0.8116 14,608 80 17,000 : 76,149 18 pop 0.7312 13,161.60 0.7312 12,430.40 17,000 50000 0.6567 18,000 II, 197.90 0.6587 70, OUD 11,856-60 17,000 0.5935 10,089.50 18,000 0.5935 10,683.00 17,000 0.5346 9,088.20 ::P2 - 1.43837 : 1.0878 6 18,000 0.5346 96.22.80 Prof Inflows 71918.50 (or) .PV of Inflows 76,149.00 lew! Cash outley 59000.00 NPV° 21,918.50 1.4384 less!- Outtay 70,000.00 .. NPV 6149.00 C) IRR (11) IRR.: 247. CAssume) (OTRE Che DF@27 PugoCF DF@24!pvol Dif's | DxR: 131 IRR = 161 17.000 13,385.80 0.7874 0.8065 Pvq DCF'S 13,710.50 Df@13) | Yr Puq DCF's. cf's Df@164 17,000 0-6200 0:6504 1,056.80 10,540.00 T 18poo 0821 15,51718D 0.88 50 15,930.00 17,00D 0-4882 8,299.40 0.5245 18.000 0.7432 8916:50 0.7831 13,377.60 14,095.80 17,000 0-3844 6,534-80 0.4230 7191.00 18,000 0.6406 11,530-80 0.6931 12,475 80 17,000 0.3027 9145.90 0.34 U 5798.70 4 Spou 0.5523 9941.40 0.6133 11,039.40 17,000 0.2383 4,051. 10 0.2151 4676.70 18,000 0-4761 8569.80 0.5428 PU of Inflower 47957.00 ..Puq Zuflows: 51,350.20 6 18,000 0.4104 7387.20 0-4803 8645.40 Worst OwHay 50,000.00 Legs! Outley 50,000.00 66,324.60 PUTR Influs=71956.80 NP - 2043.00 NPŪ, 7350:20 les roulay 79 000-00 - Oulu 75000.00 -3,675.40 : NPV = 1956.80 Miha Ruth Lupu, t. Rar bb) , 0.24+ 1350. 20 x(0-27-034 IRR = 0.13 + 1956.801 13). 0:13 + 58.706 NP-NPV) 1350-20-(-2043) 2:04404 CamScanner IRR 1956.80-(-3675.40) -0.2519 (21) 25:20 % 563220 ( .. IRR 2 14 04'}" Sanmu 9770-10 ... Pv og Inflows ...NP

Since, Project A has better NPV of 21,918.50 $, PI = 1.4384 and IRR of 25.20% (Assuming it as a short term investment period) compared to Project B's NPV of 6,149$, PI = 1.0878 and IRR of 14.04%. Hence, Project A should be preferred over Project B.