Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net 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 |
a. What are the two project’s net present values, assuming the cost of capital is 5%? 10%? 15%
· 5%:
· 10%:
· 15%
b. What are the two project’s IRR at these same costs of capital?
at 5% cost of capital
NPVofproject A = -15000000 + 5000000/1.05+ 10000000/1.05^2 + 20000000/1.05^3 =16108951.5171
NPV of project B = -15000000 + 20000000/1.05+ 10000000/1.05^2 + 6000000/1.05^3 = 18300939.4234
at 10% cost of capital
NPVofproject A = -15000000 + 5000000/1.10+ 10000000/1.10^2 + 20000000/1.10^3 =12836213.3734
NPV of project B = -15000000 + 20000000/1.10+ 10000000/1.10^2 + 6000000/1.10^3 = 15954169.7971
at 15% cost of capital
NPVofproject A = -15000000 + 5000000/1.15+ 10000000/1.15^2 + 20000000/1.15^3 =10059587.4086
NPV of project B = -15000000 + 20000000/1.15+ 10000000/1.15^2 + 6000000/1.15^3 = 13897838.4154
IRR ofproject A = 43.97%
IRRofproject B = 82.03%
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