(NPV, PI, and IRR calculations) You are considering two independent projects, project A and project B. The initial cash outlay associated with project A is $50,000 and the initial cash outlay associated with project B is $70,000. The required rate of return on both projects is 11 percent. The expected annual free cash inflows from each project are on the table below. Calculate the NPV, PI, and IRR for each project and indicate if the project should be accepted.
Project A | Project B | |
Initial Outlay | -$50,000 | -$70,000 |
Inflow year 1 | 17,000 | 18,000 |
Inflow year 2 | 17,000 | 18,000 |
Inflow year 3 | 17,000 | 18,000 |
Inflow year 4 | 17,000 | 18,000 |
Inflow year 5 | 17,000 | 18,000 |
Inflow year 6 | 17,000 | 18,000 |
Calculate the NPV, PI, and IRR for each project and indicate if the project should be accepted
Project A
Net present value can also be calculated using a financial calculator by inputting the below:
The net present value is $21,919.14.
Profitability index is calculated using the below formula:
Profitability Index= NPV + Initial investment/ Initial investment
= $50,000 + $21,919.14/ $50,000
= $71,919.14/ $50,000
= 1.4384 1.44
Internal rate of return can be calculated using a financial calculator by inputting the below:
The IRR is 25.15%.
Project B
Net present value can also be calculated using a financial calculator by inputting the below:
The net present value is $6,149.68.
Profitability index is calculated using the below formula:
Profitability Index= NPV + Initial investment/ Initial investment
= $70,000 + $6,149.68/ $70,000
= $76,149.68/ $70,000
= 1.08791.09.
Internal rate of return can be calculated using a financial calculator by inputting the below:
The IRR is 13.9979% 14%.
Both the projects can be accepted since both the projects have a positive net present value.
In case of any query, kindly comment on the solution.
(NPV, PI, and IRR calculations) You are considering two independent projects, project A and project B....
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