Question

1) A project has annual cash flows of $5,000 for the next 10 years and then $6,500 each year for the following 10 years. The IRR of this 20-year project is 12%. If the firm's WACC is 11%, what is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

2) Project S costs $12,000 and its expected cash flows would be $7,000 per year for 5 years. Mutually exclusive Project L costs $25,000 and its expected cash flows would be $10,300 per year for 5 years. If both projects have a WACC of 15%, which project would you recommend?

a. Project S, since the NPVS > NPVL.

b. Both Projects S and L, since both projects have NPV's > 0.

c. Neither Project S nor L, since each project's NPV < 0.

d. Project L, since the NPVL > NPVS.

e. Both Projects S and L, since both projects have IRR's > 0.

Answer 1

present value of cash inflows at 12% discount rate NPVv=0 At IRR, npv = 0

Calculation of initial investment: cash flows Present value cash flows Present value pv@11 % pv @ 12% year year $0.00 -$40,076 -$40,076.05 0 1 0 1 $5,000 $5,000 $4,464.29 $3,985.97 $5,000.00 $5,000.00 $5,000.00 $4,504.50 1 0.89286 1 0.9009 $4,058.11 2 0.79719 2. 0.8116 $5,000 $3,558.90 $3,655.96 3 0.71178 0.7312 $5,000 $3,177.59 $5,000.00 $5,000.00 $3,293.65 0.63552 0.6587 $5,000 $2,837.13 $2,533.16 $2,967.26 5 0.56743 5 0.5935 $5,000 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $2,673.20 6 0.50663 6 0.5346 $5,000 $5,000 $2,261.75 $2,019.42 $1,803.05 $2,408.29 7 0.45235 7 0.4817 $2,169.63 0.40388 0.4339 $5,000 $1,954.62 0.36061 0.3909 $5,000 $1,609.87 $5,000.00 $1,760.92 $2,062.34 10 0.32197 10 0.3522 $6,500 $6,500 $6,500 $1,868.59 $1,668.39 $6,500.00 11 0.28748 11 0.3173 $6,500.00 $1,857.97 12 0.25668 12 0.2858 13 $1,489.63 $6,500.00 $1,673.84 $1,507.97 0.22917 13 0.2575 $6,500 $6,500 $1,330.03 $6,500.00 14 0.20462 14 0.2320 $1,187.53 $6,500.00 $1,358.53 15 0.18270 15 0.2090 $6,500 $1,060.29 $6,500.00 $1,223.90 16 0.16312 16 0.1883 17 $6,500 $946.69 $6,500.00 $1,102.61 0.14564 17 0.1696 $6,500 $845.26 $6,500.00 $993.34 18 0.13004 18 0.1528 $6,500 $754.69 $6,500.00 $894.90 19 0.11611 19 0.1377 $6,500 $673.83 $6,500.00 $806.22 0.10367 20 20 0.1240 $2,851.74 net present value [ NPV] $40,076.05 Initial investment O N