Question

All techniques with NPV profile Mutually exclusive projects Projects A and B, of equal risk, are alteratives for expanding Rosa Company's capacity. The firm's cost of capital is 11%. The cash flows for each project are shown in the following table: a. Calculate each project's payback period. b. Calculate the nel present value (NPV) for each project. c. Calculate the internal rate of retum (IRR) for each project. d. Indicate which project you would recommend. a. The payback period of project Aisyears. (Round to two decimal places.) 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 $180.000 Project B $150,000 Initial investment (CF) Year (1) 1 2 Cash Inflows (CF) $45,000 $45,000 $50,000 $45,000 $55,000 $45,000 $60,000 $45,000 $65.000 $45,000 3 4 5 Print Done Enter your answer in the answer box and then click Check Answer.

Answer 1

2 year 3 00 D9 c =SUM(D3:08) A B с D E 1 Project A Cash flows pv@11% Present value Cumulative cash flows 0 $ (180,000.00) 1.0000 $(180,000.00) $ (180,000.00) 4. 1 $ 45,000.00 0.9009 $ 40,540.54 $ (135,000.00) 5 2 $ 50,000.00 0.8116 $ 40,581.12$ (85,000.00) 6 3 $ 55,000.00 0.7312 $ 40,215.53 $ (30,000.00) 7 4 $ 60,000.00 0.6587 $ 39,523.86 $ 30,000.00 5 $ 65,000.00 0.5935 $ 38,574.34 $ 95,000.00 9 IRR 14.94% NPV $ 19,435.38 10 11 Payback Period 3+30000/60000 3.50 Years 12 13 Project B Cash flows pv@11% Present value Cumulative cash flows 15 0 $ (150,000.00) 1.0000 $(150,000.00) $ (150,000.00) 16 1 $ 45,000.00 0.9009 $ 40,540.54 $ (105,000.00) 17 2 $ 45,000.00 0.8116 $ 36,523.01$ (60,000.00) 18 3 $ 45,000.00 0.7312 $ 32,903.61$ (15,000.00) 19 4 $ 45,000.00 0.6587 $ 29,642.89 $ 30,000.00 5 $ 45,000.00 0.5935 $ 26,705.31 $ 75,000.00 21 IRR 15.24% NPV $ 16,315.37 14 year 20 22 23 Payback Period 3+15000/45000 3.33 Years 24 25 26 Accept Project A because of higher NPV

D9 f =SUM(D3:08) B С D E A 1 Project A 2 year 3 0 4 1 5 2 6 3 74 8 5 9 IRR Cash flows - 180000 45000 50000 55000 60000 65000 =IRR(B3:38) pv@11% 1 =C3/1.11 =C4/1.11 =C5/1.11 =C6/1.11 =C7/1.11 NPV Present value =B3*C3 =B4*C4 =B5*C5 =B6*C6 =B7*C7 =B8C8 =SUM(D3:08) Cumulative cash flows =B3 =E3+B4 =E4+B5 =E5+B6 =E6+B7 =E7+B8 10 11 Payback Period 3+30000/60000 =3+30000/60000 Years pv@11% 12 13 Project B 14 year 15 0 16 1 17 2 1 Cash flows - 150000 45000 45000 Present value =B15*C15 =B16*C16 =B17*C17 =B18* C18 =B19*C19 Cumulative cash flows =B15 =E15+B16 =E16+B17 =E17+B18 =E18+B19 =E19+B20 C15/1.11 =C16/1.11 =C17/1.11 =C18/1.11 =C19/1.11 NPV 45000 18 3 19 4 20 5 21 IRR 45000 45000 =IRR(B15:B20) =B20* C20 =SUM(D15:D20) 22 23 Payback Period 3+15000/45000 =3+15000/45000 Years 24 25 26 Accept Project A because of hig