Project 1 & 2 have similar outlays, although the patterns of future cash flows a
ID: 2637346 • Letter: P
Question
Project 1 & 2 have similar outlays, although the patterns of future cash flows are different. The cash flows as well as the NPV & IRR for the two projects are shown below. For both projects, the required rate of return is 10%.
G) What are the NPVs of Project 1 & 2? 13.4 & 18.3, 18.52 & 21.36, 11.25 & 9.52, or 39.25 & 45.25
H) What are the IRRs of the two projects? 21.86% & 18.92%, 17.35% & 13.36%, 15.36% & 21.86% or 21.88% & 14.62%
I) If the two projects are mutually exclusive, what is the appropriate decision? Project 1, Project 2, Both, or None.
J) If the two projects are independent, what is the appropriate decision? Project 1, Project 2, Both, or None.
Year Project 1 Cash Flow: Project 2 Cash Flow: 0 -50 -50 1 20 0 2 20 0 3 20 0 4 20 100Explanation / Answer
Answer for G) is 13.4 and 18.3 Workings are as below:
Answer for H):
Internal rate of return for Project 1 and Project 2 is 21.86 and 18.92.
Workings are as follows:
Calculation of IRR for project 1 :
Interpolating between 21% and 22% IRR of Project 1 is arrived as
21%+ (0.81/.81+.13) = 21.86.
Calculation of IRR for project 2:
IRR for project 2 is 18%+(1.58/1.58+.13))=18.92
Answer for I:
If two projects are mutually exclusive then project 1 has to be selected as its IRR is higher than Project 2.
Answer for J:
If both the projects are independent then Project 1 and Project 2 both can be taken up as both the projects IRRs are greater than the cost of capital.
Year Project 1 Cash Flows PV Factor @10% Cash flow* PV factor Project 2 Cash Flows PV Factor Cash flow* PV factor 0 (50.00) 1.00 -50.00 -50.00 1.00 -50.00 1 20 0.91 18.18 0.00 0.91 0.00 2 20 0.83 16.53 0.00 0.83 0.00 3 20 0.75 15.03 0.00 0.75 0.00 4 20 0.68 13.66 100.00 0.68 68.30 Net present value 13.40 18.30Related Questions
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