Question

NPV, with rankings Botany Bay, Inc., a maker of casual clothing, is considering four projects shown in the following table, B: Because of past financial difficulties, the company has a high cost of capital at 14.7%. a. Calculate the NPV of each project, using a cost of capital of 14.7%. b. Rank acceptable projects by NPV. c. Calculate the IRR of each project and use it to determine the highest cost of capital at which all of the projects would be acceptable. a. Calculate the NPV of each project, using a cost of capital of 14.7%. Data Table - X (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Project A $49,700 Project D $180,800 Initial investment (CF) Year (t) Project B Project C $100,700 $80,700 Cash inflows (CF) $36,000 $19,800 $51,600 $39,400 $51,700 $60,700 $20,700 $20,700 $20,700 $100,700 $79,200 $59,200

Answer 1

a]

NPV is calculated using NPV function in Excel.

fNPV(14.7%, B3:B5) +B2 В6 A В E Cash Flow-Cash Flow Cash Flow C D Cash Flow 1 Year A B 0 ($49,700) ($100,700) ($80,700) ($180,800) $20,700 $20,700 $20,700 ($2,201)| 2 $36,000 $19,800 $100,700 3 $51,600 $39,400 $79,200 $59,200 $6,426 4 2 $51,700 $60,700 5 3 $4,169 $6,736 6 NPV n

A. В D Е Cash Flow - B Cash Flow- C Cash Flow D 1 Year Cash Flow A |-49700 -100700 2 0 -80700 -180800 36000 20700 3 1 19800 100700 51600 4 2 20700 39400 79200 51700 20700 59200 5 3 60700 |=NPV(14.7% ,B3 :B5)+B2_-NPV(14.7% ,C3:C5)+C2 =NPV(14.7%, D3:D5) +D2 =NPV(14.7 % , E3:E5)+E2 6 NPV

b]

Project A is unacceptable as its NPV is negative.

Projects with higher NPV will be ranked higher.

Rank 1 - Project C.

Rank 2 - Project D.

Rank 3 - Project B.

c]

IRR is calculated using IRR function in Excel.

fi IRR(C2:C5) С7 A D В E Cash Flow-Cash Flow-Cash Flow - Cash Flow 1 Year A |в C 0 ($49,700) ($100,700) ($80,700) ($180,800)| $20,700 2 $36,000 $19,800 $100,700 3 $20,700 $51,600 $39,400 $79,200 4 2 $20,700 12.02% $51,700 17.03% $60,700 18.86% $59,200 5 3 17.03% 7 IRR

A B C E Cash Flow-A Cash Flow B Cash Flow C Cash Flow D 1 Year -100700 36000 -80700 20 -49700 -180800 19800 3 1 20700 100700 20700 51600 39400 4 2 79200 51700 5 3 20700 60700 59200 |-IRR(E2:E5) |=IRR(B2:B5) -IRR(C2:C5) =IRR(D2:D5) 7 IRR

IRR is the cost of capital at which NPV is zero. Project A would be acceptable if the NPV is at least zero. The cost of capital is 12.02%, at which the NPV of Project A is zero.

The highest cost of capital at which all projects would be acceptable is 12.02%