Botany Bay, Inc,, a maker of casual clothing is considering four projects shown

Question

Botany Bay, Inc,, a maker of casual clothing is considering four projects shown in the following table, Because of ast financial difficulties, the company has a high cost of capital at 14.2%. Which of these projects would be acceptable under those cost circumstances?

Table:

Initial investment - Project A - $49,200

Year 1 - Cash inflows - $20,300

Year 2 - Cash inflows - $20,300

Year 3 - Cash inflows - $20,300

Initial investment - Project B - $99,600

Year 1 - Cash inflows - $36,300

Year 2 - Cash inflows - $50,200

Year 3 - Cash inflows - $51,700

Initial investment - Project C - $80,400

Year 1 - Cash inflows - $20,500

Year 2 - Cash inflows - $41,000

Year 3 - Cash inflows - $59,300

Initial investment - Project D - $180,300

Year 1 - Cash inflows - $99,400

Year 2 - Cash inflows - $80,000

Year 3 - Cash inflows - $60,200

a. Calculate the NPV of each project, using a cost of capital of 14.2%. What is the NPV of project A.

b. Rank the 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.

Explanation / Answer

Cost of Cap 14.20% Year PV of $1 Project A PV of Cash Flow A Project B PV of Cash Flow B Project C PV of Cash Flow C Project D PV of Cash Flow D 0 1 -49200 -49200 -99600 -99600 -80400 -80400 -180300 -180300 1 0.875657 20300 17775.83 36300 31786.34 20500 17950.96 99400 87040.28 2 0.766775 20300 15565.53 50200 38492.09 41000 31437.76 80000 61341.98 3 0.671431 20300 13630.06 51700 34713.01 59300 39815.89 60200 40420.17 NPV -2228.58 5391.438 8804.613

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