Question

this is really though for me someone please answer

(16.67 points-Each question is equally weighted for the entire test to sum to 100%) The large miture retailer "Sofa So Good" is evaluating two mutually exclusive projects: NPV versus IRR. Consider the following projects, where the firms may only ch The firm's cost of capital/required return equals 9% PLEASE NOTE: The firm's cost of capital, K, acts as a hurdle rate, and is based on the costs involved in financing other firm projects. The Cost of capital allows us to decide to accept or reject an investment, using IRR, and also allows us to use it as the discount rate, R, in NPV calculations. Years Cash Flow Project X Cash Flow ProjectY The differential (X-Yor (Y-X $69,000 $13,000 $69,000 $29,000 33,000 S38,000 $24,000 $27,000 a) What would be the Internal Rate of Return for each investment, X and Y. b) what would be the NPV's of each project, if the cost of capital is 9% for the firm, "Sofa So Good"? e) What is the crossover point, otherwise known as the discount crossover rate, where both projects cross? (Remember to subtract X- Y cash flows or Y-X, and then set series equal to zero, and solve for IRR) d) Please Include an NPV Profile for the projects (see Figure 8.7 on page 253 in textbook and study guide/practice exam), including calculating the NPVs for a range of the discount rates, 0%, 5%, 10%, 15%, 20%, and 25%-this allows for more accurate plotting of the profile. e) Finally, which project should you accept and when (under what circumstances)? Here is what to expect in terms of your answers and NPV profile to problem #3, approximately. If you don't show all work, you will not receive credit: Expect to see your NPVx to be between $1.00 and S50 and NPVy to be between-$1,000 and -$2,000 when I-9%. You will want to use increments of $5,000's, ranging on the Y axis from -$20,000 to $0 to +$20,000. Your cost of capital will lie at the 9% on your X axis, so I would use or write in increments of 0%, 5% to 25%. You should also expect that your crossover rate will be between 15%- 19% to give an idea, while your IRRx should be equal to rate approximately between 9-10% and IRRY for Y should be between 7-8%. Hence, along your X axis should have the following points on it, in this order, beginning 0%: The Cost of Capital at 99, IRRY, IRRx, followed the cross over rate which will be a rate (the discount crossover rate) between, 15-19%. Lastly, expect the crossover point to by far exceed the IRR's for both projects. In terms of interpreting the crossover point on the NPV profile, the two projects cross at some point, which you will calculate and find to be between 15-19%, where for all NPV's below the actual crossover rate or below this range of rates, NPV for X is more valuable, as long as the NPVs are positive. For all discount rates, beyond the crossover rate, let's says 20% for example, Project Y is technically of higher value, yet this lies within the the negative NPV values. Hope that makes some sense. Clearly project X is favored, exceed al 6

Answer 1

CF Project X CF Project Y X-Y Years 69000 69000 13000 29000 16000 33000 24000 9000 38000 27000 11000 Formula 1 Present value 2 NPV- Cash flow (1+discount rate) time in years resent value of inflows - present v value of outflows olation- base amount+(diff in base amounts) *result of base result of base 2 Intemal Rate of Return (RR) is the rate at which the present value of cash inflows present value of cash outflows or when Net Present Value (NPV) 0. We use hit & trial method to find out the IRR ect X 38000 Cash flows 69000 13000 33000 @9% discount rate 69000 11927 27775 2934369045 45 @9.032% discount rate 27759 69000 11923 2931768999 27273 28550 a 10% discount rate 69000 11818 67641 1359

ANS WER 052 Project Y 27000 Cash flows 69000 29000 24000 107 @7.8% discount rate @7.887% discount rate @7.9% discount rate @8% discount rate 69000 26902 20653 2155369107 26880 20619 69000 2150169000 21493 68984 16 69000 26877 20614 68861 69000 26852 20576 21433

ProjectX Year 3 TOTAL Cash Flows 69000 13000 33000 38000 27775 11927 29343 Project Y Year 3 TOTAL 27000 Cash Flows 69000 29000 Net Present value 26606 20200 20849 Year Cash Flows (X @ 10% discount rate @ 15% discount rate 16000 11000 14545 7438 8264 1157 13913 7233 6805 125 7106 13831 6725 7047 @ 16% discount rate using extrapolation formula 13793 6688 57 15%-1%*57/125 15.46% 5.681 ANSWER

NPV at NPV at NPV at NPV at NPV at NPV at Discount rate Discount rate Discount Discount Discount Discount Discount Discount Discount Discount Discount Discount Project X cash flows rate 10% rate 15% rate 2096 rate 2596 Project Y cash flows rate 0% rate 5% rate 10% rate 15% rate 20% rate 25% 69000 69000 69000 69000 69000 69000 -69000 G13928302495310833 1359 9447 145s 6668 13000 12381 27619 217 25108 21833 13604 18194 13000 1818 11304 29000 24000 24000 17991 33000 33000 99322495322917 211 28550 24986 69 38000 27000 38000 32826 194 27000 23324 17523 11322 3414 21991 22041 15000 13259 18024 8378 -22 34691 44985 11000 Discount rate NPV Project X NPV Project Y diff 11000 15000 6139 3711 1359 8378 7019 10% 22041 14284 20% 34691 21432 13259 44985 2696 18024 Clealy, NPV or project X is higher than Project Y at all ranges Moreover, the IRR of Project X is 9.032% which is higher than NPV of Project Y 7.887% Hence, project X is more beneficial than Project