Question

1. Two projects being considered are mutually exclusive and have the following cash flows: Year 0 Project A -$50,000 15,000 15,000 15,000 15,000 15.000 Project B -$50,000 0 0 1 0 4 15 0 99,000 If the required rate of return on these projects is 10 percent, which would be chosen and why?

Answer 1

The answer is as follows:

According to NPV Method, where NPVie. Net Present Value = Present Value of Cash In flows - Present Value of Cash Outflows Also, Presenf Value - future Value (1+) where, i= Interest ne Number of periods Year Cash Inflows of cash Inflow of project a Project A (4) discounted @ 10% (0) 15000 15000 13636.36364 (1 +100%) 15000 15000 12396.69421 per period 2 (1+10%) در 1 5000 11269072201 15000 (17109.)3 15000 10245.20183 15000 (1+10%)4 5 15000 9313.819846 15000 (1 +100%) Paesent value of cash Inflow 20:56861.80154 discounted@1046 .. NPV of Poojeed A = $ 56861.80154 -$50000 6861.80154

Present Value of Cash Inflow of hoject B $99000 (1+100%) $99000x 0.6209213231 $61471•21098 :: NPV - $61471-21098 - 50000 - $ 11471:21098 Let us also calculate IR Rice. the Intermal Rate fer both the projects. At IRR, Present Value of In flows are always equal Present Value of Outflowós, Project Year 1 Cash Inflows pu of cash Inflower PV Of Cash Inflower discounted@ 15% discounted@ 16% (8) ) 15000 15000 15000 (1716) = 13043.47826 :12931.03448 15000 15000 15000 (1+15%) (1 +16%)2 11342.15501 - ]]]47.44352 15000 15000 15000 |(1415.7.) (1+16) 9862.743486 9609.865103 2 co 3 3

4 (4+16%.)4 5 22 50000 x -15 15000 15000 15000 (1+15%)4 = 8576. 298684 - 8284.366468 15000 15000 15000 (4+15%)5 (1716°/-)5 = 7457.651029 = 7141-695231 Prof Cash 'In Hows → 50282.32647 49114.4048 By Trial and Error Method, 15% -> 50282-32647 16% -> 49114.4048 i. 50000-50282.32647 16-15 49114.4048-50282. 3 2647 x-15 7 28 2:32647 71167.92167 0.24+ 15 ...a 15:24º7. :. IRR of Project A= 15.24% Poglect B Present Value of Cash Inflows of hoject B discounted @ 14% 99000 (1414/5 99000 x 0.5193686644 $51417.49777 07, 1 or, 2 = X =

of X 50000 Now, Present Value discounted @ 18% $ 99000 (1+ICS 99000x 0.4971767353 $ 49220.49679. By Trial and Error Method, 14% → 51417.49777 1507 49220.49676 X-14 50000 - 51417.49727 15-14 49220.499679-51417-49999 or 2-14 + 1417.49777 72197.00098 0.64+14 6. X = 14.64• ... IRR of project B = 14.64% So, NAVOf Project Bie.$ 11471-21098 is greater than the NPV Of Pooject Aje. $6861.80154. But, IRR of Project Are. 15:24).** greater than the IRR of Project Bie. 14.64% So, in of mutually exclusive projects, if the NPV and the IRR suggest too different projects, we should choose the project with a higher positive NPV.880 you should choose froject B : ta ori # is case