What does this really mean? of capital include an inflation premium? vy er atwav

Question

What does this really mean? of capital include an inflation premium? vy er atwavs agree with NPV as to whether a particular ble or not? NCF, 20,096 (30,372) , 7550; TE.-(3572); TE (6554) MTE-3600: NCF %; Revised NPV (k-13%, iP-3%,-S1.638 0 Use the following data to answer the next 3 questions: Robert of Morin Company is evaluating two mutually exclusive projects (expected cash flows shown below). The firm's cost of capital is 9 percent. Year Project A Project B (650) 310A (550) 6 400 6697 31%420 .) (45) 175 29 57, Calculate the NPVs and IRRs for Projects A and B. a. Project A's NPV is $180.9 and Project B's NPV is $79.36. b Project A's NPV is $80.09 and Project B's NPV is $97.71 c. Project A's IRR is 18.12 percent, and Project B's IRR is 21.57 percent d. Project A's IRR is 18.12 percent, and Project B's IRR is 20.35 percent. e. None of the above. 11 12 Calculate the Discounted Payback Period for Project A. a. 2.1667 years b. 2.4997 years c. 2.3089 years 400 115 5 d. 2.3603 years 2835 e. 2.3085 13 Draw the projects' NPV profiles in the space provided below. Which of the following statement CORRECT? Remember, these proiects are mutually exclusive

Explanation / Answer

Answer is e. 2.3085 years

Let us first calculate the discounted cash flows:

CF0 = -550/(1 + 9%)0 = -550

CF1 = 400/(1 + 9%)1 = 366.9275. Cumulative cash flow = -550 + 366.9275 = -183.0280

CF2 = 175/(1 + 9%)2 = 147.2940. Cumulative cash flow = -183.0280 + 147.2940 = -35.7335

CF3 = 150/(1 + 9%)3 = 115.8275. Cumulative cash flow = -35.7335 + 115.8275 = 80.094

Now, the cumulative cash flow becomes positive between period 2 and 3. So discounted payback period would be between 2 and 3, i.e. 2 + fraction of a year

Fraction of year = 35.7335/115.8275 = 0.3085 year

Discounted payback = 2 + 0.3085 years = 2.3085 years

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