Question

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3. DMC company is evaluating two projects Land S. The projects' after-tax cash flow ($) (including depreciation) are following: Project L Projects Year 0 -7000 - 13500 Year 1 1000 0 Year 2 1500 6000 Year 3 1500 7500 Year 4 2500 8000 Year 5 2000 Year 6 3000 What is NPV, IRR, and Payback for each project if the required rate of return for capital is 10%. If the projects are mutually exclusive which project should DMC take?

Answer 1

B5 Book1 - Excel File Home Insert Page Layout Formulas Data Review View Help Search Calibri 12 - A A ab Wrap Text Accounting $ - % . * Cut EB Copy Format Painter Clipboard Paste BIU . Merge & Center 4.0 .00 .00 5.0 Conditional Format as Formatting Table Font Alignment Number C14 =NPV(B1,C7:C12)+C6 B с D E F G H А 1 Required return 2 10% 3 4 5 Year 6 7 8 Project L 0 $ 1 $ 2 $ 3 $ 4 $ 5 $ 6 $ Cash flow Projects -7,000.00 $ 1,000.00 $ 1,500.00 $ 1,500.00 $ 2,500.00 $ 2,000.00 3,000.00 Cumulative cash flow Project L Projects -13,500.00 $ 1,000.00 $ 6,000.00 $ 2,500.00 $ 6,000.00 7,500.00 $ 4,000.00 $ 13,500.00 8,000.00 $ 6,500.00 $ 21,500.00 $ 8,500.00 $ 11,500.00 9 10 11 12 13 14 $ 15 NPV IRR Payback period 918.53 $ 13.69% 4.25 2,557.65 16.52% 3 16 17 18 19 20 21

Book1 - Excel File Home Insert Page Layout Formulas Data Review View Help Search Calibri 12 AA ab Wrap Text Percentage Comma Comma [0] % Cut Copy Format Painter Paste BIU € Merge & Center - $ - % 6.0 .00 .00 5.0 Currency [0] Conditional Format as Currency Formatting Table Styles Clipboard Font Alignment Number D15 f =IRR(D6:010) B с D E F G A 1 Required return 0.1 2 3 4 Cumulative cash flow Projects 5 Project L 6 7 Year 0 1 2 3 Cash flow Projects - 13500 0 6000 7500 8000 Project L -7000 1000 1500 1500 2500 2000 3000 8 =C7 =E7+C8 =E8+C9 =E9+C10 =E10+C11 =E11+C12 =D7 =F7+D8 =F8+D9 =F9+D10 9 10 4 11 5 6 12 13 14 15 NPV =NPV(B1,C7:C12)+C6 IRR EIRR(C6:C12) Payback period =B10+(-C6-E10)/C11 =NPV(B1,D7:D10)+D6 =IRR(D6:D10) =B9 16 17 18 19 20 21
The project L payback period is 4.25 years and that of project S is 3 years.

Project S should be taken or accepted because it has higher NPV, higher IRR and low payback period than project L.