Question

NPV and IRR analysis of projects Thomas Company is considering two mutually exclusive projects. The firm, which has a cost of capital of 14%, has estimated its cash flows as shown in the following table: a. Calculate the NPV of each project, and assess its acceptability. b. Calculate the IRR for each project, and assess its acceptability. a. The NPV of project A is $ (Round to the nearest cent.) Х i Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Project A $120,000 Project B $91,000 Initial investment (CF) Year (1) 2 Cash inflows (CFt) $20,000 $60,000 $25,000 $40,000 $40,000 $25,000 $60,000 $5,000 $60,000 $15,000 3 4 5 Print Done

Answer 1

Ans:- NPV = Present Value of cash flow - Initial Investment. we will use the NPV function of excel to find the PV of cash flow and then subtract with the initial investment to get the NPV. we will use the IRR function of excel to find IRR of the projects.

K22 for А B с D E 1 2 3 Years 4 0 5 1 6 2 CF of Project A CF of Project B - 120000 -91000 20000 60000 25000 40000 40000 25000 60000 5000 60000 15000 7 3 4 8 9 5 10 11 NPV 10466.35 20035.50 12 13 IRR 16.92% 26.78%

K22 foc A B с D E 1 2 3 4 CF of Project B -91000 60000 40000 5 6 Years CF of Project A 0 - 120000 1 20000 2 25000 3 40000 4 60000 5 60000 7 25000 8 5000 9 15000 10 11 NPV =NPV(14%,D5:09)-120000 =NPV(14%,E5:E9)-91000 12 13 IRR =IRR(D4:09) =IRR(E4:59)

From the above analysis, it is clear that project B should be selected because it has more NPV value than A and also its Internal rate of return (IRR) is higher than project B. Therefore Project B should be selected.

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