Question

#1 Questions a) to e) refer to two projects with the following cash flows: Year Project B Project A -$200 -$200 80 100 100 100 a) If the opportunity cost of capital is 10%, which of these projects is worth pursuing? Explain. b) Suppose that you can choose only one of these projects. Which would you choose? The discount rate is still 10%. Justify your reasoning. c) Which project would you choose if the opportunity cost of capital were 16%? d) What are the internal rates of return on projects A and B? e) In light of your answers to Problems a) - d), is there any reason to believe that the project with the higher IRR is the better project?

Answer 1

As per rules I am answering the first 4 subparts of the question

a: Both projects should be selected since both have positive NPV

	Project A	Project B
NPV at 10%	53.59	48.69

b: Select Project A since that has a higher NPV.

c: Select both since they have positive NPVs

	Project A	Project B
NPV at 16%	23.85	24.59

d:

	Project A	Project B
IRR	21.86%	23.38%

Workings

AutoSave o 9.3HD Book1 - Excel Sign in - 0 X File Home Insert Draw Page Layout Formulas Data Review View Help Tell me what you want to do Share Comments = = 0 insert E 48 O Z Calibri B IU - - 11 - -A A - A - = E Paste LE- General $ -% 3- Delete - Format . Conditional Format as Formatting Table - Styles Cell Styles Sort & Find & Filter - Select Editing Clipboard Font Alignment Number Cells B1 - X fi Year 80 80 Project A Project B -200 -200 100 80 100 100 80 Project A Project B NPV at 10% =NPV(10%,C3:C6)+C2 =NPV(10%,D3:06)+D2 NPV at 16% =NPV(16%,C3:C6)+C2 ENPV(16%,D3:06)+D2 =IRR(C2:C6) =IRR(D2:06) IRR 17 Sheet1 Ready E -- - + 100% QA DA ENG 10:35 PM 0