Your division is considering two projects with the following cash flows (in millions):
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a. To calculate NPV, use NPV function in EXCEL
=NPV(rate,Year1 to year3 cashflows)-Year0cashflow
project A,NPV@5% WACC=NPV(5%,Year1 to year3 cashflows)-17=$0.47 million
Project B,NPV@5% WACC=NPV(5%,Year1 to year3 cashflows)-26=$3.23 million
project A,NPV@10% WACC=NPV(10%,Year1 to year3 cashflows)-17=-$0.86 million
Project B,NPV@10% WACC=NPV(10%,Year1 to year3 cashflows)-26=$0.84 million
project A,NPV@15% WACC=NPV(15%,Year1 to year3 cashflows)-17=-$2.02 million
Project B,NPV@15% WACC=NPV(15%,Year1 to year3 cashflows)-26=-$1.22 million
b. For IRR there is no need to use WACC but only take decision whether to accept teh project or not. If IRR>WACC, project should be accepted and if IRR<WACC, project needs to be rejected.
Use IRR function in EXCEL
=IRR(Year0 to Year3 cashflows)
Project A, IRR=IRR(Year0 to Year3 cashflows)=6.68%
Project B, IRR=IRR(Year0 to Year3 cashflows)=11.96%
Project A | Project B | ||
Year0 | -17.0 | -26.0 | |
Year1 | 8.0 | 13.0 | |
Year2 | 8.0 | 10.0 | |
Year3 | 3.0 | 9.0 | |
5% | NPV | 0.47 | 3.23 |
10% | NPV | -0.86 | 0.84 |
15% | NPV | -2.02 | -1.22 |
IRR | 6.68% | 11.96% |
c. If WACC is 5%, Project B has to be selected because of higher NPV than Project A NPV
if WACC is 10%, Project B has to be selected because of higher NPV than Project A NPV
If WACC is 15%, Both Projects A and B are need to be rejected becasue of negatiive NPV's
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