Part-a:
Project-A:
At IRR,
Present Value of Cash Outflows = Present value of Cash Inflows
Let IRR of Project –A be “x%”
At IRR,
99 = 22/(1+x)^1 + 30/(1+x)^2 + 41/(1+x)^3 + 52/(1+x)^4
Computing for x , we get x = 14.785%
Therefore, IRR of Project A is 14.79%
.
Project-B:
At IRR,
Present Value of Cash Outflows = Present value of Cash Inflows
Let IRR of Project –B be “y%”
At IRR,
99 = 52/(1+y)^1 + 41/(1+y)^2 + 30/(1+y)^3 + 21/(1+y)^4
Computing for y , we get y = 20.183%
Therefore, IRR of Project B is 20.18%
.
.
.
Part-b:
NPV of Project-A:
Year | CashFlows | DF Working | Discounting Factor @ 11.3% | Present Value |
0 | -99 | 1 | 1 | (99.00) |
1 | 22 | 1/1.113^1 | 0.898472597 | 19.77 |
2 | 30 | 1/1.113^2 | 0.807253007 | 24.22 |
3 | 41 | 1/1.113^3 | 0.725294705 | 29.74 |
4 | 52 | 1/1.113^4 | 0.651657417 | 33.89 |
NPV of Project-A: | 8.61 |
.
NPV of Project-B:
Year | CashFlows | DF Working | Discounting Factor @ 11.3% | Present Value |
0 | -99 | 1 | 1 | (99.00) |
1 | 52 | 1/1.113^1 | 0.898472597 | 46.72 |
2 | 41 | 1/1.113^2 | 0.807253007 | 33.10 |
3 | 30 | 1/1.113^3 | 0.725294705 | 21.76 |
4 | 21 | 1/1.113^4 | 0.651657417 | 13.68 |
NPV of Project-B: | 16.26 |
.
.
.
Part-C:
Let the cost of capital at which both the two projects are indifferent be "z%
NPV of Project – A = NPB of Project – B
22/(1+z)^1 + 30/(1+z)^2 + 41/(1+z)^3 + 52/(1+z)^4 - 99 = 52/(1+z)^1 + 41/(1+z)^2 + 30/(1+z)^3 + 21/(1+z)^4 - 99
30/(1+z)^1 + 11(1+z)^2 -11/(1+z)^3 – 31/(1+z)^4 = 0
Computing for z , we get z = 0.98%
.
Therefore , at cost of capital = 0.98% , we will be indifferent between the two projects.
.
.
Part-D:
We should invest in Project-B , since it has higher NPV and higher IRR as compared to that of Project-B.
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