Questions and Problems 299 6. Martin Medical expects Alpha Project and Beta Proj

Question

Questions and Problems 299 6. Martin Medical expects Alpha Project and Beta Project to generate the following: Alpha Project 1 (in thousands) Givens Initial investment Net operating cash flows Years 0 ($16,000) ($8,000) $5,000 $10,000 $14.000 $24.000 Beta Project2 (in thousands) Givens Initial investment Net operating cash flows Years 0 ($24,000) $6,000 $6,000 $6,000 $6,000 $6,000 a. Determine the payback for both projects. b. Determine the IRR. c. Determine the NPV at a cost of capital of 14 percent. ina entity is starting a new inpa-

Explanation / Answer

A) Calcuating the pay back period = PV of cash inflow / intial outflow

Project ALPHA

Payback period = 4 year + 4133/12456

= 4.33 Years

PROJECT BETA

Pay back period = More than 5 year OR Approx 6 years

B) IRR,

Outflow = inflow

ALPHA,

16000 = (8000) *PV factor + 5000 *PV factor + 10000*PV factor +14000 *PV factor +24000*PV factor

Rate = 24.24 %

BETA,

24000 = 6000 (Rate, 5)

Rate = 25.42 %

C)

NPV of alpha,

=24323 (from table) - 16000

= $8323

NPV of beta,

= 20596 - 24000

= $ (3404)

Year Cash flow PV factor PV cash flow 0 (16000) 1 (16000) 1 (8000) .877 (7016) 2 5000 .769 3845 3 10000 .675 6750 4 14000 .592 8288 5 24000 .519 12456

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