Question

1. Your division is considering two investment projects, each of which requires an upfront expenditure of $15 million. You estimate that the investments will produce the following cash flows:

                                                                                                                                    Year                   Project A                                                    Project B                                                       1                    $5,000,000                                             $20,000,000                                                    2                 $10,000,000                                             $10,000,000                                                       3                 $20,000,000                                             $6,000,000                                                                       

1. What is each project’s Net Present Value, assuming that your division’s cost of capital is 5%? 10%? 15%?

       (b) What is each project’s Internal Rate of Return?

Answer 1

Calculate the NPV and IRR as follows:

А B 141 Year 142 143 144 c Project A Project B 0 -$15,000,000.00 -$15,000,000.00 $5,000,000.00 $20,000,000.00 2 $10,000,000.00 $10,000,000.00 $20,000,000.00 $6,000,000.00 $16,108,951.52 $18,300,939.42 $12,836,213.37 $15,954,169.80 $10,059,587.41 $13,897,838.42 43.97% 82.03% 145 146 NPV @ 5% 147 NPV @ 10% 148 NPV @ 15% 149 IRR

Formulas:

141 Year 142 0 143 1 144 2 145 3 146 NPV @ 5% 147 NPV @ 10% 148 NPV @ 15% 149 IRR В Project A Project B =-15*1000000 =-15*1000000 5000000 20000000 10000000 10000000 20000000 6000000 =NPV(5%,B143:B145)+B142 =NPV(5%,C143:C145)+C142 =NPV(10%,B143:B145)+B142 =NPV(10%,C143:C145)+C142 =NPV(15%,B143:B145)+B142 =NPV(15%,C143:C145)+C142 =IRR(B142:B145) =IRR(C142:C145)