(10-10a-b) Project S has a cost of $9,000 and is expected to produce benefits (c

Question

(10-10a-b) Project S has a cost of $9,000 and is expected to produce benefits (cash flows) of $2,700 per year for 5 years. Project L costs $26,000 and is expected to produce cash flows of $7,100 per year for 5 years.

A.Calculate the two projects' NPVs, assuming a cost of capital of 10%.Round your answers to the nearest cent.

Project L

Which project would be selected, both are mutally exclusive

B.Calculate the two projects' IRRs.

Project L

Which project would be selected, assuming they are mutually exclusive?

Please round two decimal places

Project L

Which project would be selected, both are mutally exclusive

B.Calculate the two projects' IRRs.

Project L

Which project would be selected, assuming they are mutually exclusive?

Explanation / Answer

Project S has a cost of $9,000 and is expected to produce benefits (cash flows) of $2,700 per year for 5 years. Project L costs $26,000 and is expected to produce cash flows of $7,100 per year for 5 years.

A.Calculate the two projects' NPVs, assuming a cost of capital of 10%.Round your answers to the nearest cent.

Project S

NPV = -9000 + 2700/1.1 + 2700/1.1^2+ 2700/1.1^3 + 2700/1.1^4 + 2700/1.1^5

NPV = $ 1235.12

Project L

NPV = -26000 + 7100/1.1 + 7100/1.1^2+ 7100/1.1^3 + 7100/1.1^4 + 7100/1.1^5

NPV = $ 914.59

Answer

Project S = $ 1235.12

Project L= $ 914.59

Which project would be selected, assuming they are mutually exclusive?

If we have to select between both than Project S as its NPV higher than Project L

If there is sufficient amount of investment are available than Both would be selected as boths NPV are Positive

B.Calculate the two projects' IRRs. Round your answers to two decimal places.

At IRR, NPV = 0

Project S

9000 = 2700/(1+r) + 2700/(1+r)^2+ 2700/(1+r)^3 + 2700/(1+r)^4 + 2700/(1+r)^5

By Solving we get

IRR = 15.24%

Project L

26000 = 7100/(1+r) + 7100/(1+r)^2+ 7100/(1+r)^3 + 7100/(1+r)^4 + 7100/(1+r)^5

By Solving we get

IRR = 11.37%

Answer

Project S = 15.24%

Project L = 11.37%

Which project would be selected, assuming they are mutually exclusive?

Project S would be selected as its IRR is higher than Project L

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