Question

Piercy, LLC, has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) -$54,000 -$54,000 30,000 17,600 24.000 21,600 18.000 26,000 12,800 25,600 8-1. What is the IRR for each of these projects? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a-2. If you apply the IRR decision rule, which project should the company accept? b-1. Assume the required return is 14 percent. What is the NPV for each of these projects? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b-2. Which project will you choose of you apply the NPV decision rule? -1. Over what range of discount rates would you choose Project A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places. e... 32.16.) c-2. Over what range of discount rates would you choose Project B? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, ... 32.16.) At what discount rate would you be indifferent between these two projects. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a-1. Project Project B b-1 Proiect

Answer 1

Year Year Year O Year 1 Year 2 Year 3 Year 4 Cash flow project A PVF 25% (54,000.00) 1.00 30,000.00 0.80 24,000.00 0.64 18,000.00 0.51 12,800.00 0.41 NPV 25% PV CF PVF 20% (54,000.00) 1.00 24,000.00 0.83 15,360.00 0.69 9,216.00 0.58 5,242.88 0.48 -181.12 NPV 20% PV CF PVF 14% (54,000.00) 1.00 25,000.00 0.88 16,666.67 0.77 10,416.67 0.67 6,172.84 0.59 4256.17 NPV 25% PV CF (54,000.00) 26,315.79 18,467.22 12,149.49 7,578.63 10511.12 Year 0 Year 1 Year 2 Year 3 Year 4 Cash flow project APVF 25% (54,000.00) 1.00 17,600.00 0.80 21,600.00 0.64 26,000.00 0.51 25,600.00 0.41 NPV 25% PV CF PVF 20% (54,000.00) 1.00 14,080.00 0.83 13,824.00 0.69 13,312.00 0.58 10,485.76 0.48 -2298.24 NPV 20% PV CF PVF 14% (54,000.00) 1.00 14,666.67 0.88 15,000.00 0.77 15,046.30 0.67 12,345.68 0.59 3058.64 NPV 25% PV CF (54,000.00) 15,438.60 16,620.50 17,549.26 15,157.26 10765.61 a) Interpolation formula lower rate + difference in rate (lower rate NPV/(lower rate NPV-higher rate NPV)] 24.80 IRR 22.85

Based on IRR evaluation Project A should be selected NPV @ 14% Project A 1 0511.12 Project B 10765.61 project with higher NPV is chosen i.e Project B e) Range of project selection of A Rate of WACC to 24.8% Range of project selection of B Rate of WACC to 22.85%

Project indifference point IRR of difference in cashflow of both projects is 13.49% PV CF PVF 25% 1.00 12,400.00 0.80 2,400.00 0.64 (8,000.00) 0.51 (12,800.00) 0.41 NPV 25% PV CF PVF 20% 1.00 9,920.00 0.83 1,536.00 0.69 (4,096.00) 0.58 (5,242.88) 0.48 2117.12 NPV 20% 10,333.33 1,666.67 (4,629.63) (6,172.84) 1197.53 13.49