Your division is considering two investment projects, each of which requires an

Question

Your division is considering two investment projects, each of which requires an up-front expenditure of $23 million. You estimate that the investments will produce the following net cash flows:

What are the two projects' net present values, assuming the cost of capital is 5%? Round your answers to the nearest dollar.
Project A $  
Project B $  

What are the two projects' net present values, assuming the cost of capital is 10%? Round your answers to the nearest dollar.
Project A $  
Project B $  

What are the two projects' net present values, assuming the cost of capital is 15%? Round your answers to the nearest dollar.
Project A $  
Project B $  

What are the two projects' IRRs at these same costs of capital? Round your answers to two decimal places.
Project A     %
Project B     %

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Project A = -23000000 + 4000000/(1+.05)^1 + 10000000/(1+.05)^2 + 20000000/(1+.05)^3 = $7156570.56

Project B = -23000000+ 20000000/(1+.05)^1 + 10000000/(1+.05)^2 + 8000000/(1+.05)^3 = $12028614.62

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Part B:

Project A = -23000000 + 4000000/(1+.10)^1 + 10000000/(1+.10)^2 + 20000000/(1+.10)^3 = $3927122.46

Project B = -23000000+ 20000000/(1+.10)^1 + 10000000/(1+.10)^2 + 8000000/(1+.10)^3 = $9456799.40

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Part C:

Project A = -23000000 + 4000000/(1+.15)^1 + 10000000/(1+.15)^2 + 20000000/(1+.15)^3 = $1190022.19

Project B = -23000000+ 20000000/(1+.15)^1 + 10000000/(1+.15)^2 + 8000000/(1+.15)^3 = $7212870.88

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Part D:

Project A

To calculate IRR, you need to put the value of NPV as 0 and solve for r as follows:

NPV = 0 = -23000000 + 4000000/(1+r)^1 + 10000000/(1+.05)^2 + 20000000/(1+.05)^3

Solving for r, we get IRR as 17.45%

IRR = 17.45%

--------

Project B:

To calculate IRR, you need to put the value of NPV as 0 and solve for r as follows:

NPV = 0 = -23000000+ 20000000/(1+r)^1 + 10000000/(1+r)^2 + 8000000/(1+r)^3

Solving for r, we get IRR as 37.15%

IRR = 37.15%

Thanks.

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