Question

The software application development company for which you work is evaluating two different options for starting a new application development within the upcoming year. The company seeks to earn a return on each project that exceeds its cost of capital of 6.5 %. Further, the company assumes that given the current economic conditions, inflation may be expected to grow by 1% for the next year. Assume that the project takes place in Year 0 and begins earning cash flows on its application product from years 1 through 5.

Project Cash Flows

	Year 0	Y1	Y2	Y3	Y4	Y5
Project A	(-$50,000.00)	$5,000.00	$10,000.00	$20,000.00	$30,000.00	$65,000.00
Project B	(-$65,000.00)	$15,000.00	$20,000.00	$40,000.00	$45,000.00	$25,000.00

Answer the following questions based on the analysis of the given cash flows for Project A versus Project B:

What is the NPV for each proposed project?

Which project would you select based on the NPV?

Alter the discount rate based on the method presented in the videos in the Financial Analysis Tools section below so that you reach an NPV of "0" (or close to "0") thereby arriving at the project IRR. Which IRR is higher?

If inflation were not a factor, would your results change?

Answer 1

Given that Cost of Capital = 65% Dis Count ratesafter adiusting fo inflaon CtCostof Capita) x (+Inflalion)-1 C1-065) x C141 2. 7.565 /. (a) Basad on altulatons n belouw table Npv and NPv of B: S56,907.97 of A S54,923:12 NP of Bis higher Praiect be Sclecte B_Should Caleu lakion, C) For TRR Cash Floial Cito(here tis time) TRR of A 2903/ TRRof B 29.327. Hence TRRBIS geal er CS Scanned with CamScanner

) yes ip Tlalion not a factor YeSUt would change Fiven in table 2 as Infatonalisted Trfaton adisled Cash locs (toble-) 757 Dislant Yale year o Y3 Project A s,00 S,050 00S10,20100S,a6.62| S312812S68,YS 65 S5493-12|29.03/ Pioiert B s5oco o) S5,150 00 S240200 4212 oy SAsETA SA525|S56,.7/29.32 fandions NPV and TRR Calcolated Using excel Tnflation adosed Cash flass - Cash at year lx1+9nflafon"1 Inflabon adusled ash fos for yeart Cach at yev ExCSafickor Distaunt viale 6500 NPV TRR 4 aBle-2 year o 5 3 1 PYaect ssoAco-0)S5,000 00 Slacoo-00 So,cco 0030000 S65poo00S50,836 36 27.797. A 2 0s/. HoUec rs65,000 00)S15,00 0o S2000-00 Sopoo00 S45,00 oS5AcodoS53,058 22 Scanned with CS CamScanne