Question

Crane Corp. management is evaluating two mutually exclusive projects. The cost of capital is 15 percent. Costs and cash flows for each project are given in the following table. Year Project 1 Project 2 0 $1,190,556 -$1,107,928 225,000 315,000 315,000 315,000 405,000 315,000 450,000 315,000 675,000 315,000 Calculate NPV and IRR of two projects. (Enter negative amounts using negative sign, e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to O decimal places, e.. 1,525. Round IRR answers to 2 decimal places, s. 15.25 or 12.25%) NPV of project is $ NPV of project 2 is $ IRR of project 1 is IRR of project 2 is Which project should be accepted? Crane Corp. should accept

Answer 1

NPV = PV of Cash Inflows - PV of Cash Outflows

Project 1:

Year	CF	PVF @15%	Disc CF
0	$ -11,90,556.00	1.0000	$ -11,90,556.00
1	$     2,25,000.00	0.8696	$     1,95,652.17
2	$     3,15,000.00	0.7561	$     2,38,185.26
3	$     4,05,000.00	0.6575	$     2,66,294.07
4	$     4,50,000.00	0.5718	$     2,57,288.96
5	$     6,75,000.00	0.4972	$     3,35,594.30
NPV			$    1,02,458.76

Project 2:

Year	CF	PVF @15%	Disc CF
0	$ -11,07,928.00	1.0000	$ -11,07,928.00
1	$     3,15,000.00	0.8696	$     2,73,913.04
2	$     3,15,000.00	0.7561	$     2,38,185.26
3	$     3,15,000.00	0.6575	$     2,07,117.61
4	$     3,15,000.00	0.5718	$     1,80,102.27
5	$     3,15,000.00	0.4972	$     1,56,610.67
NPV			$      -51,999.14

IRR is the Rate at which PV of Cash Inflows are equal to PV of Cash Outflows

Project 1:

Year	CF	PVF @18%	Disc CF
0	$ -11,90,556.00	1.0000	$ -11,90,556.00
1	$     2,25,000.00	0.8475	$     1,90,677.97
2	$     3,15,000.00	0.7182	$     2,26,228.10
3	$     4,05,000.00	0.6086	$     2,46,495.50
4	$     4,50,000.00	0.5158	$     2,32,104.99
5	$     6,75,000.00	0.4371	$     2,95,048.72
NPV			$                -0.72

Thus IRR is 18%

Project 2:

Year	CF	PVF @13%	Disc CF
0	$ -11,07,928.00	1.0000	$ -11,07,928.00
1	$     3,15,000.00	0.8850	$     2,78,761.06
2	$     3,15,000.00	0.7831	$     2,46,691.21
3	$     3,15,000.00	0.6931	$     2,18,310.80
4	$     3,15,000.00	0.6133	$     1,93,195.40
5	$     3,15,000.00	0.5428	$     1,70,969.38
NPV			$                -0.15

Thus IRR is 13%

Project 1 is selected as it has higher NPV as well as higher IRR