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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.

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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 14.7%. Which of these projects would be acceptable under those cost circumstances?

Table:

Initial investment - Project A - $49,200

Year 1 - Cash inflows - $19800

Year 2 - Cash inflows - $19800

Year 3 - Cash inflows - $19800

Initial investment - Project B - $99,800

Year 1 - Cash inflows - $36900

Year 2 - Cash inflows - $50000

Year 3 - Cash inflows - $50700

Initial investment - Project C - $80,400

Year 1 - Cash inflows - $20,100

Year 2 - Cash inflows - $40400

Year 3 - Cash inflows - $59,400

Initial investment - Project D - $1792 00

Year 1 - Cash inflows - $100100

Year 2 - Cash inflows - $79700

Year 3 - Cash inflows - $61000

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

a.

Npv of project A is negative. -2228.582

b. ranking:

Project C

Project D

Project B

c. IRR can be calculated using IRR function in excel by selecting the range of values.

Project A 11.48%

Project D 17.22%

Project C 19.64%

Project B 17.26%

The maximum rate should be 19.64%

Years Discount Factor (14.2%) Project A PV of Cash flows Project B PV of Cash flows Project C PV of Cash flows Project D PV of Cash flows 0 1 -49200 -49200 -99600 -99600 -80400 -80400 -180300 -180300 1 0.875656743 20300 17775.83 36300 31786.33975 20500 17951 99400 87040.3 2 0.766774731 20300 15565.53 50200 38492.09149 41000 31437.8 80000 61342 3 0.671431463 20300 13630.06 51700 34713.00664 59300 39815.9 60200 40420.2 NPV -2228.582 5391.437879 8804.61 8502.43

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