12.00% 15.53% 18.62% 19.08% 20.46% Green Grocers is deciding among two mutually
ID: 2648254 • Letter: 1
Question
12.00%
15.53%
18.62%
19.08%
20.46%
Green Grocers is deciding among two mutually exclusive projects. The two projects have the following cash flows:
Project A
Project B
Year
Cash Flow
Cash Flow
0
-$50,000
-$30,000
1
10,000
6,000
2
15,000
12,000
3
40,000
18,000
4
20,000
12,000
The company's cost of capital is 10 percent (WACC = 10%). What is the net present value (NPV) of the project with the highest internal rate of return (IRR)?
$ 7,090
$ 8,360
$11,450
$12,510
$15,200
Braun Industries is considering an investment project which has the following cash flows:
Year
Cash Flow
0
-$1,000
1
400
2
300
3
500
4
400
The company's WACC is 10 percent. What is the project's payback, internal rate of return, and net present value?
Payback = 2.4, IRR = 10.00%, NPV = $600.
Payback = 2.4, IRR = 21.22%, NPV = $260.
Payback = 2.6, IRR = 21.22%, NPV = $300.
Payback = 2.6, IRR = 21.22%, NPV = $260.
Payback = 2.6, IRR = 24.12%, NPV = $300.
a.12.00%
b.15.53%
c.18.62%
d.19.08%
e.20.46%
Explanation / Answer
Solution :
The cash flows for 1 st question is not visible , therefore I am answering 2 and 3 questions only:
-----------------------------------------------------------------------------------------------------------------------------------------------------
2) The present value of cash flows
Answer is E : $ 15,200
To calculate IRR of project A
$ 15,200.46 = $ 10,000/(1+r)1 + $ 15,000/(1+r)2 + $ 40,000/(1+r)3 + $ 20,000/(1+r)4
Annuity = $ 85,000/4
Annuity = $ 21,250
Pay back period = $ 50,000/$21250
Pay back period = 2.35
Consulting the table for Present Value Interest Factor for an annuity (PVIFA), we find that for n = 4 years, the value nearest to 2.35 is which corresponds to a discounting factor of 25 %.
At 25% discount factor
The Net present value is shown below
$46,272.00
Net present value = - $ 50,000+ $ 46,272.00
NPV = -3728
At 22% the NPV
NPV = -$50,000+49330.91
NPV = -$ 669.09
At 21%
NPV = -$ 50,000+50418.77
NPV = 418.77
IRR = 21 % + 50418.77 - 50,000/50418.77 - 49330.91
IRR = 21.38
--------------------------
IRR of Project B
Annuity = $ 48,000/4
Annuity = $12000
Pay back period = 30,000/12000
Pay back period = 2.5
Consulting the table for Present Value Interest Factor for an annuity (PVIFA), we find that for n = 4 years, the value nearest to 2.5 is which corresponds to a discounting factor of 22%
At 20%
The NPV = -$ 462.96
At 19%
NPV = $ 181.50
IRR = 19+ 30181-30000/30181- 29537.04
IRR = 19.28
---------------------------------------------------------------------------------------------------------------
3) Answer is : Payback = 2.6, IRR = 21.22%, NPV = $260
To calculate pay back period
Pay back year = 2
Pay back period = 2 + 1000-700/500
Pay back period = 2.6 years
To calculate NPV
NPV = -$ 1000+$ 1260
NPV = 260
----------------------------------------------
To calculate IRR
Annuity = 1600/5
Annuity = 320
Pay back period= 1000/320
Pay back period= 3.125
At 21%
NPV at 21% = 4.32
At 22%
1004.322466
NPV at 22% = 14.66
IRR = 21 + 1004.32-1000/1004.32 - 985.34
IRR = 21.29 %
Project A year cash flows present value of cash flows 0 ($50,000) 1 $10,000 $9,090.91 2 $15,000 $12,396.69 3 $40,000 $30,052.59 4 $20,000 $13,660.27 $65,200.46 Net present value of Project A = -$50,000+$65200.46 NPV of Project A = $ 15,200.46 Project B year cash flows present value of cash flows 0 ($30,000) 1 $6,000.00 $5,454.55 2 $12,000.00 $9,917.36 3 $18,000.00 $13,523.67 4 $12,000.00 $8,196.16 $37,091.73 Net present value of Project B = -$ 30000+$37091.73 NPV of project B = $ 7091.73Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.