Question

Project A B Co A $ 24,800 - 24,800 C1 +$ 9,850 C2 +$9,850 0 C3 +$ 9,850 + 31,200 a. Given the following interest rates (0%, 2%, 4%, 6%, 8%, 10%, 12%, 14%, 16%, 18%, 20%), above what interest rates would you prefer project A to B? Interest rates above [ 1% b. What is the IRR of each project? (Round your answers to 2 decimal places.) IRR Project T % Project B %

Answer 1

(a) NPV of both projects at the given rates were calculated using NPV function of Excel. It shows that at 6% and higher rate, Project A has higher NPV than Project B. Hence project A will be preferred over project B above 6% (of the given set of rates.

Sample cell values as follows:

B10 А 1 Year wN IRR NPV fc =NPV(D10,B2,B3,B4,B5) с | Ε Project A Project B Int rate -24800 -24800 9850 9850 0 9850 31200 9.30% 7.95% $4,750.00 $6,400.00 $3,535.54 $4,510.25 $2,437.16 $2,823.74 4% $1,442.61 ! $1,317.10 $541.12 ($30.03) 8% ($276.83) ($1,235.43) 10% ($1,019.61) ($2,314.69) 12% ($1,694.67) ($3,281.48) 14% ($2,308.61) ($4,147.83) 16% ($2,867.30) ($4,924.34) 18% ($3,375.96) ($5,620.37) 20% 6%

(b) Computed using IRR function of Excel, IRR of Project A =9.30% and IRR of Project B=7.95%

Screen shot with Cell values of Project A is appended below:

B6 A 1 Year - Foc IRR(B2:35) B Project A Project B Int rate -24800 -24800 9850 9850 9850 31200 9.30%) 7.95% 6 IRR