It\'s time to decide how to use the money your firm is expected to make this yea
ID: 2701598 • Letter: I
Question
It's time to decide how to use the money your firm is expected to make this year. Two investment opportunities are available, with net cash flows as follows:
Year Project X Project Y
0 (Now) ($20,000) ($20,000)
1 8,500 4,200
2 7,000 5,700
3 5,500 7,200
4 4,000 8,700
a. Calculate each project's Net Present Value (NPV), assuming your firm's weighted average cost of capital (WACC) is 7%
b. Calculate each project%u2019s Internal rate of Return (IRR).
c. Plot NPV profiles for both projects on a graph).
d. Assuming that your firm's WACC is 7%:
(1) If the projects are independent which one(s) should be accepted?
(2) If the projects are mutually exclusive which one(s) should be accepted?
Explanation / Answer
Year Project X Project Y
0 (Now) ($20,000) ($20,000)
1 8,500 4,200
2 7,000 5,700
3 5,500 7,200
4 4,000 8,700
a) R= 10%
NPV X = $ 376.68
NPV Y = -$119.39
b) IRR X = 10.988%
IRR Y = 9.754%
c)
WACC NPV Project X NPV Project Y
0.00% 5000 5800
1.00% 4415.921903 5044.437015
2.00% 3862.420928 4331.848164
3.00% 3337.695016 3659.537718
4.00% 2840.064568 3025.002113
5.00% 2367.962986 2425.91454
6.00% 1919.928032 1860.110912
7.00% 1494.593928 1325.57706
8.00% 1090.68412 820.4370549
9.00% 707.004656 342.9425353
10.00% 342.4381097 -108.5370473
11.00% -4.061996305 -535.523357
12.00% -333.4763092 -939.4373496
13.00% -646.7243534 -1321.606767
14.00% -944.6688607 -1683.27301
15.00% -1228.119757 -2025.597455
16.00% -1497.837834 -2349.667247
17.00% -1754.538141 -2656.500635
18.00% -1998.893102 -2947.051881
19.00% -2231.535413 -3222.215772
20.00% -2453.0607 -3482.83179
d) in both cases, project X should be chosen, since NPV X > NPV Y and IRR X > IRR Y
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