Question

1. Calculate the net present value (NPV) for both projects, and determine which project should be accepted based on NPV. Round both NPVs to the nearest dollar.

Use the following information to answer the next three questions. Consider the cash flows from two mutually exclusive projects: Cash Flow Year Project A Project B 0 -$420,000-$420,000 1 $140,000 $400,000 2 $230,000 $110,000 3 $331,000 $140,000 The appropriate discount rate is 8.5%.

2. Calculate the internal rate of return (IRR) for both projects, and determine which project should be accepted based on IRR.

3. Calculate the net present value (NPV) for both projects using the crossover rate as your discount rate. Round both NPVs to the nearest dollar.

Please show all work. Thank you.

Answer 1

DZ f =SUM(D3:06) B С D E - A 1 Project A 2 year Cash flows 3 0 4 F G H Project A year Cash flows [email protected]% Present value 0 $ (420,000.00) 1.0000 $ (420,000) 1$ 140,000.00 0.8941 $ 125,180 21 $ 230,000.00 0.7995 $ 183,883 3 $ 331,000.00 0.7149 $ 236,619 IRR 26.20% NPV $ 125,682 [email protected]% (420,000.00) 140,000.00 230,000.00 331,000.00 26.20% NPV 1 Present value 1.0000 $ (420,000) 0.9217 $ 129,032 0.8495 $ 195,375 0.7829 $ 259,143 $ 163,550 5 2 31 $ 6 7 IRR 8 9 Project B 10 year 11 Cash flows 0 $ 1$ 12 [email protected]% (420,000.00) 400,000.00 110,000.00 140,000.00 33.54% NPV Present value 1.0000 $ (420,000) 0.9217 $ 368,664 0.8495 $ 93,440 0.7829 $ 109,607 $ 151,711 Project B year Cash flows [email protected]% Present value 0 $ (420,000.00) 1.0000 $ (420,000) 1$ 400,000.00 0.8941 $ 357,657 2 $ 110,000.00 0.7995 $ 87,944 3 S 140,000.00 0.7149 $ 100,080 IRR 33.54% NPV $ 125,682 13 2 $ 14 3 $ 15 IRR 16 18 year 17 Crossover rate IncrementalCash flows 19 0 $ 20 1 $ (260,000.00) 21 2 $ 120,000.00 22 3 $ 191,000.00 23 IRR 11.84% 24 25 1 NPV Accept Project A 26 2 IRR Accept Project B 27

D7 f =SUM(D3:06) B С D E G H A 1 Project A 2 year 3 0 [email protected]% Project A year 0 1 4 1 1 Cash flows -420000 140000 230000 331000 =IRR(B3:36) Present value =B3*C3 =B4*C4 =B5*C5 L=B6* C6 =SUM(D3:D6) Cash flows -420000 140000 230000 331000 =IRR(G3:66) [email protected]% Present value 1 =G3*H3 =H3/(1+$B$23) =G4*H4 =H4/(1+$B$23) =G5*H5 =H5/(1+$B$23)=G6*H6 NPV =SUM(13:16) =C3/1.085 =C4/1.085 =C5/1.085 NPV 5 2 2 6 3 3 IRR 7 IRR 8 9 Project B 10 year Cash flows -420000 Project B year 0 11 0 1 400000 1 12 1 13 2 [email protected]% 1 =C11/1.085 =C12/1.085 =C13/1.085 NPV Present value =B11*C11 =B12*C12 =B13*C13 =B14*C14 =SUM(D11:014) Cash flows [email protected]% Present value -420000 =G11*H11 400000 =H11/(1+$B$23) =G12*H12 110000 =H12/(1+$B$23) =G13*H13 140000 =H13/(1+$B$23) =G14*H14 =IRR(G11:G14) NPV =SUM(111:114) 2 110000 140000 =IRR(B11:B14) 14 3 15 IRR 3 IRR 16 17 Crossover rate 18 year 19 0 20 1 21 2 22 3 23 IRR 24 25 1 26 2 27 IncrementalCash flows =B3-B11 =B4-B12 =B5-B13 =B6-B14 =IRR(B19:B22) NPV Accept Project A Accept Project B IRR