Question

Use the following table to answer questions 1 – 6. The wacc is 10% for all projects in this table. Year Project A -1,000 1,000 Project B -1,000 300 400 500 600 Project C -1,000 550 450 350 250 Project D -1,000 600 800 1. Compute the Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI), and Payback Period (PB) for each project: Project A Project B Project C Project D WACC 10.0% 10.0% 10.0% 10.0% NPV 2. Projects A through C are independent (ignore project D): a. Which project(s) should be selected? b. By how much should the value of the firm change given these selections? 3. Projects A through C are mutually exclusive and cannot be replicated (ignore project D): a. Which project(s) should be selected? b. By how much should the value of the firm change given these selections?

Please help me solve 4-8

Answer 1

Problem . 4		0.961538462	0.924556213	0.888996359	0.854804191	0.821927
Calculation of Cross over rate for Project B and C
Since crossover rate is the rate at which NPVs of two projects are equal, we can find it by equating NPV equation for the first project with NPV equation for the second project and then solving it for "r" using interpolation method to find out the IRR
	Project B	Project C	Difrrential
Initial Outflow	1000	1000	0
Cash Flow at end of year 1	300	600	-300
Cash Flow at end of year 2	400	800	-400
Cash Flow at end of year 3	500	0	500
Cash Flow at end of year 4	600	0	600
Lets equate the NPV and find the Internal rate of return(IRR) of the projects using interpolation method
	Period	Diff. Cash Flow	PV Factor	PV @ 10%	PV Factor	PV @ 15%
	@ 10%	@15%
	0	0	1	0	1	0
	1	300	0.9091	273	0.8696	261
	2	400	0.8264	331	0.7561	302
	3	-500	0.7513	-376	0.6575	-329
	4	-600	0.683	-410	0.5718	-343
	NPV			-182		-109
	IRR =	10% + 182( 15%- 10%)                   (182-109)
	IRR =	22.47%
Hence the Cross Over rate for these tow projects is 22.47%

Problem 8
Particulars	Year	PVF @ 10%	project for 3 years	PV OF CASH FLOWS	project for 2' years	PV OF CASH FLOWS	project for 1 years	PV OF CASH FLOWS
A. Cash Outflow	0	1	-5000	-5000	-5000	-5000	-5000	-5000
B. Cash Inflow
	1	0.9091	1600	1454.56	1600	1454.56	1600	1454.56
	2	0.8264	2500	2066	2500	2066		0
	3	0.7513	2000	1502.6	0	0		0
C. Salvage Value
	1	0.9091	0	0	0	0	3500	3181.85
	2	0.8264	0	0	2000	1652.8		0
	3	0.7513	0	0		0		0
Total Inflows(B+C)				5023.16		5173.36		4636.41
NPV (B+C-A)				23.16		173.36		-363.59
Since when the project is undertaken for 2 Years the NPV is highest, so we can conclude that the 2 year is the Economic life of the project