Text Box Options are as follows: Graph: Project X or Project Y for both boxes Po

Question

Text Box Options are as follows:

Graph: Project X or Project Y for both boxes

Point A on graph corresponds to a cost captial of:

21.25%
23.47%
15.63%
13.92%
18.83%

Point B on graph corresponds to a cost captial of:

23.47%
18.83%
15.63%
13.92%
21.25%

Options for both Net Present Value Boxes:

$144.25
$172.24
$159.52
$191.70
$147.00

NPV profiles Camino Technologies is evaluating two mutually exclusive projects with following net cash flows label each projects's NPV profile on the graph nelow. Camino Technologies' primary objects is to maximize shareholder value. Camio wants to accept the projets that add the most value for shareholders. Which project should Camio accept?

Explanation / Answer

Point A on the graph corresponds to the cost of capital of 15.63%.

Point B on the graph corresponds to the cost of capital of 21.25%

With WACC being 9.6%, we can arrive at the NPV by discouting the cash inflows of project X & Y.

Cash inflows of X

Cash inflows of Y

NPV of a project = Present value of cash inflows - cash outflows

NPV of a project X = 1172.24 - 1000 = 172.24

NPV of a project Y = 1144.25 - 1000 = 144.25

NPV & IRR don't lead to conflicting results. Basically, they are two different ways of looking at the viability of a project. Infact, in order to arrive at a certain decision, both the methods need to be used simultaneously.

NPV is computed by discounting the cash flows to be generated over the years with Weighted average cost of capital (WACC) & subtracting it with cash outflows.IRR is the discount rate which at which NPV is zero. In other words, it is the rate at which a certain project doesn't earn over and above its estimated cost.It just breaks-even.A no profit no loss situation. Now if WACC>IRR, we shouldn't accept that project. If IRR> WACC, we should accept the project. If WACC = IRR, we may or may not accept the project, subject to the discretion of the management.

Camino Technologies should accept Project X as it has a higher NPV.

136.86 249.75 265.85 519.78

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