1.Consider the following two projects: Project C/F0 C/F1 C/F2 C/F3 C/F4 C/F5 C/F

Question

1.Consider the following two projects:
Project C/F0 C/F1 C/F2 C/F3 C/F4 C/F5 C/F6 C/F7 Discount Rate
Alpha -79 20 25 30 35 40 N/A N/A 15%
Beta -80 25 25 25 25 25 25 25 16%
1) The net present value (NPV) for project alpha is closest to:
A)$20.96 B) $14.41 C)$24.01 D) $16.92

2.The cash flows for four projects are shown below, along with the cost of capital for these projects. If these
projects are mutually exclusive, which one should be taken?
A)Year: 0 1 2 3 4 5
Cash flow: -$5000 $2000 $2000 $2000 $2000 $2000
Cost of Capital: 6%

B)Year: 0 1 2 3 4 5

Cash flow: -$6000 $2500 $2500 $2500 $2500 2,00

Cost of Capital: 7%

C)Year: 0 1 2 3 4 5
Cash flow: -$7000 $3000 $3000 $3000 $3000 $3000
Cost of Capital: 8%

D)Year: 0 1 2 3 4 5
Cash flow: -$8000 $3200 $3200 $3200 $3200 $3200
Cost of Capital: 9%

3.Time: 0 1 2 3
Investment A: -$1 million $300,000 $400,000 $500,000
Investment B: -$1 million $500,000 $400,000 $300,000
An investor is considering the two investments shown above. Her cost of capital is 9%. Which of the
following statements about these investments is true?
A)The investor should take investment B since it has a greater net present value (NPV).
B)The investor should take investment B since it has a greater internal rate of return (IRR).
C)The investor should take investment A since it has a greater internal rate of return (IRR).
D)The investor should take investment A since it has a greater net present value (NPV).

Explanation / Answer

1.

The NPV of Project Alpha is 16.94, which is near to option D, i.e.16.92.

2. Computation of NPV :

Since, the NPV for Project C is highest, Project C should be taken.

3. Calculation of NPV :

Calculation of IRR :

Project A = 8 + [17600/(17600-(-)2100)] x 1

=> 8 + [17600/19700]

=> 8 + 0.89 = 8.089%

Project B = 9 + [26900/(26900-(-)5400)] x 2

=> 9 + [26900/32300] x 2

=> 9 + 1.66 = 10.66%

From, the above calculations, we get that, statement (A) and (B) are true.

Year Alpha Cash Flow PVF PV C/F0 -79 1.000 -79.00 C/F1 20 0.870 17.40 C/F2 25 0.756 18.90 C/F3 30 0.658 19.74 C/F4 35 0.572 20.02 C/F5 40 0.497 19.88 C/F6 C/F7 Total 71 16.94

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