Question

2. Two projects being considered are mutually exclusive and have the following projected cash flows:. If the

required rate of return on these projects is 11 percent, which would be chosen and why?

	Project A	Project B
Year	Cash Flow	Cash Flow
0	-40,000	-40,000
1	15,625	0
2	15,625	0
3	15,625	0
4	15,625	0
5	15,625	99,500

3. Two projects being considered are mutually exclusive and have the following projected cash flows:. If the

required rate of return on these projects is 6 percent, what is each projects NPV?

	Project A	Project B
Year	Cash Flow	Cash Flow
0	-80,000	-80,000
1	20,000	0
2	20,000	0
3	20,000	0
4	20,000	0
5	20,000	100,000

Answer 1

2.

	H	I	J	K
			Project A
6			Discount rate	0.11
7	Year	Cash flows	PVF@11% = 1 (1+r)^n	Present Value
8	0	-40000	1.000000	-22000.00
9	1	15625	0.900901	14076.58
10	2	15625	0.811622	12681.60
11	3	15625	0.731191	11424.87
12	4	15625	0.658731	10292.67
13	5	15625	0.593451	9272.68
14
15	NPV			35748.39
16
	PROJECT B
	H	I	J	K
19			Project B
20			Discount rate	0.11
21	Year	Cash flows	PVF@11% = 1 (1+r)^n	Present Value
22	0	-40000	1.000000	-22000.00
23	1	0	0.900901	0.00
24	2	0	0.811622	0.00
25	3	0	0.731191	0.00
26	4	0	0.658731	0.00
27	5	99500	0.593451	59048.41
28
29	NPV			37048.41

FORMULA:

	H	I	J	K
			Project A
6			Discount rate	0.11
7	Year	Cash flows	PVF@11% = 1 (1+r)^n	Present Value
8	0	-40000	=1/(1+$K$6)^H8	-22000
9	1	15625	=1/(1+$K$6)^H9	=I9*J9
10	2	15625	=1/(1+$K$6)^H10	=I10*J10
11	3	15625	=1/(1+$K$6)^H11	=I11*J11
12	4	15625	=1/(1+$K$6)^H12	=I12*J12
13	5	15625	=1/(1+$K$6)^H13	=I13*J13
14
15	NPV			=SUM(K8:K13)
16
	PROJECT B
	H	I	J	K
19			Project B
20			Discount rate	0.11
21	Year	Cash flows	PVF@11% = 1 (1+r)^n	Present Value
22	0	-40000	=1/(1+$K$6)^H22	-22000
23	1	0	=1/(1+$K$6)^H23	=I23*J23
24	2	0	=1/(1+$K$6)^H24	=I24*J24
25	3	0	=1/(1+$K$6)^H25	=I25*J25
26	4	0	=1/(1+$K$6)^H26	=I26*J26
27	5	99500	=1/(1+$K$6)^H27	=I27*J27
28
29	NPV			=SUM(K22:K27)

PROJECT A				PROJECT B
IRR				IRR
	A	B			C	D
	Year	Cash flow			Year	Cash flow
1	0	-40000		1	0	-40000
2	1	15625		2	1	0
3	2	15625		3	2	0
4	3	15625		4	3	0
5	4	15625		5	4	0
6	5	15625		6	5	99500
7				7
8		=IRR(B1:B6)		8		=IRR(D1:D6)
9	IRR	27.44%		9	IRR	19.99%

FORMULA:

PROJECT A				PROJECT B
IRR				IRR
	A	B			C	D
	Year	Cash flow			Year	Cash flow
1	0	-40000		1	0	-40000
2	1	15625		2	1	0
3	2	15625		3	2	0
4	3	15625		4	3	0
5	4	15625		5	4	0
6	5	15625		6	5	99500
7				7
8		=IRR(B1:B6)		8		=IRR(D1:D6)
9	IRR	=IRR(O9:O15)		9	IRR	=IRR(S9:S15)

PROJECT B HAS HIGHEST NPV SO ITS CHOOSEN BY COMPARING NPV AND IRR.

3.

	H	I	J	K
			Project A
6			Discount rate	0.06
7	Year	Cash flows	PVF@6% = 1 (1+r)^n	Present Value
8	0	-80000	1.000000	-22000.00
9	1	20000	0.943396	18867.92
10	2	20000	0.889996	17799.93
11	3	20000	0.839619	16792.39
12	4	20000	0.792094	15841.87
13	5	20000	0.747258	14945.16
14
15	NPV			62247.28
16
	PROJECT B
	H	I	J	K
19			Project B
20			Discount rate	0.06
21	Year	Cash flows	PVF@6% = 1 (1+r)^n	Present Value
22	0	-80000	1.000000	-22000.00
23	1	0	0.943396	0.00
24	2	0	0.889996	0.00
25	3	0	0.839619	0.00
26	4	0	0.792094	0.00
27	5	100000	0.747258	74725.82
28
29	NPV			52725.82

PROJECT 'A' HAS HIGHEST NPV THAN PROJECT B.

FORMULA:

	H	I	J	K
			Project A
6			Discount rate	0.06
7	Year	Cash flows	PVF@6% = 1 (1+r)^n	Present Value
8	0	-80000	=1/(1+$K$6)^H8	-22000
9	1	20000	=1/(1+$K$6)^H9	=I9*J9
10	2	20000	=1/(1+$K$6)^H10	=I10*J10
11	3	20000	=1/(1+$K$6)^H11	=I11*J11
12	4	20000	=1/(1+$K$6)^H12	=I12*J12
13	5	20000	=1/(1+$K$6)^H13	=I13*J13
14
15	NPV			=SUM(K8:K13)
16
	PROJECT B
	H	I	J	K
19			Project B
20			Discount rate	0.06
21	Year	Cash flows	PVF@6% = 1 (1+r)^n	Present Value
22	0	-80000	=1/(1+$K$6)^H22	-22000
23	1	0	=1/(1+$K$6)^H23	=I23*J23
24	2	0	=1/(1+$K$6)^H24	=I24*J24
25	3	0	=1/(1+$K$6)^H25	=I25*J25
26	4	0	=1/(1+$K$6)^H26	=I26*J26
27	5	100000	=1/(1+$K$6)^H27	=I27*J27
28
29	NPV			=SUM(K22:K27)