SHOW ALL WORK FOR FULL CREDIT Consider Project X and another Project, Project Y,

Question

SHOW ALL WORK FOR FULL CREDIT

Consider Project X and another Project, Project Y, with net cash flows as follows:

---- Net Cash Flows ----

                                 Project X            Project Y

            Initial Cost at T-0 (Now)               ($10,000)             ($20,000)

cash inflow at the end of year 1          5,000                    3,000

cash inflow at the end of year 2          4,000                    8,000

cash inflow at the end of year 3         3,000                  13,000

a. Construct NPV Profiles for these two projects, assuming your firm

Explanation / Answer

a)

NPV Project X = -10,000 + 5,000 / (1+0.09)^1 + 4,000 / (1+0.09)^2 + 3,000 / (1+0.09)^3

NPV Project X = 270.43

NPV Project Y = -20,000 + 3,000 / (1+0.09)^1 + 8,000 / (1+0.09)^2 + 13,000 / (1+0.09)^3

NPV Project Y = -475.88

b) Cost of Capital 5%

NPV Project X = -10,000 + 5,000 / (1+0.05)^1 + 4,000 / (1+0.05)^2 + 3,000 / (1+0.05)^3

NPV Project X = 981.54

NPV Project Y = -20,000 + 3,000 / (1+0.05)^1 + 8,000 / (1+0.05)^2 + 13,000 / (1+0.05)^3

NPV Project Y = -1,343.27

Accept Project Y at 5% cost of capital

NPV Project X = -10,000 + 5,000 / (1+0.10)^1 + 4,000 / (1+0.10)^2 + 3,000 / (1+0.10)^3

NPV Project X = 105.18

NPV Project Y = -20,000 + 3,000 / (1+0.10)^1 + 8,000 / (1+0.10)^2 + 13,000 / (1+0.10)^3

NPV Project Y = -894.07

Accept Project X at 10% cost of capital

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