Your dhizion is concidering wo pre;ccts with the tollowing cash tiows In million

Question

Your dhizion is concidering wo pre;ccts with the tollowing cash tiows In millions): Project A Project EB 2. what are the pra ects Np s a $21 89 83 420 um nq the WACC s S%? Round Your answer t o da:imal paces. Do rot round vaur itermediate calculations Enter vaur answer in millions. Far ?? ample, an ans er at s 10 550 0 00 should be entered as 10 SS N at val?should be indicated by aminus sign Projact A Project ProjectA Project miliun be inlicated by a minus sign Project Project $ b. what dre the projects' IRRs dssuminy the ewactis 5??Hound your anser to tm, ueomal plates. Du "ut round your intermediate caculatin. Project Project A Project 9 what die [he p' UJects' ERRs assuming th” wACC is 15%, Round your arswe' to tw? dto'nal clares Du not rard your inten-dist Project A Project 0 (ek ulations.

Explanation / Answer

a.

NPV= Present Value of Cash Inflows - Present Value of Cash Outflows

Project A:

NPV = $ 14 * 1/(1.05) ^ 1 + $ 9 * 1/(1.05) ^ 2 +$ 3* 1/(1.05) ^ 3 - $ 21

= $ 3.09

Project B:

NPV = $ 20 * 1/(1.05) ^ 1 + $8 * 1/(1.05) ^ 2 +$ 15* 1/(1.05) ^ 3 - $ 35

= $ 4.26

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NPV= Present Value of Cash Inflows - Present Value of Cash Outflows

Project A:

NPV = $ 14 * 1/(1.10) ^ 1 + $ 9 * 1/(1.10) ^ 2 +$ 3* 1/(1.10) ^ 3 - $ 21

= $ 1.42

Project B:

NPV = $ 20 * 1/(1.10) ^ 1 + $8 * 1/(1.10) ^ 2 +$ 15* 1/(1.10) ^ 3 - $ 35

= $ 1.06

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NPV= Present Value of Cash Inflows - Present Value of Cash Outflows

Project A:

NPV = $ 14 * 1/(1.15) ^ 1 + $ 9 * 1/(1.15) ^ 2 +$ 3* 1/(1.15) ^ 3 - $ 21

= -$ 0.05

Project B:

NPV = $ 20 * 1/(1.15) ^ 1 + $8 * 1/(1.15) ^ 2 +$ 15* 1/(1.15) ^ 3 - $ 35

= - $ 1.70

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b.

Project A

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

21= 14/(1.0x) + 9/ (1.0x)^2 +3 / (1.0x)^3

Or x= 14.825%

Hence the IRR is  14.83%

Project B

Let the IRR be y.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

35 = 20 /(1.0y) + 8 / (1.0y)^2 +15 / (1.0y)^3

Or x= 11.842%

Hence the IRR is 11.84%

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