Nico Manufacturing is considering investment in one of two mutually exclusive pr
ID: 2708191 • Letter: N
Question
Nico Manufacturing is considering investment in one of two mutually exclusive projects X and Y which are described below. Nico Manufacturing's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Nico estimates that the beta for project X is 1.20 and the beta for project Y is 1.40
Project X
Initial Investment = $3,500,000
Cash Inflows
year 1 $1,500,000
year 2 $1,500,000
year 3 $1,500,000
year 4 $1,500,000
Project Y
Initial Investment = $3,900,000
Cash Inflows
year 1 $1,100,000
year 2 $1,600,000
year 3 $1,900,000
year 4 $2,300,000
***Calculate the NPV of projects X and Y assuming the firm used the overall cost of capital to evaluate projects X and Y
Please show all work and steps
Explanation / Answer
NPV of projects X = -3,500,000 + 1,500,000/1.15 +1,500,000/1.15^2 + 1,500,000/1.15^3 + 1,500,000/1.15^4=$782,467.54
NPV of projects Y = -3,900,000 + 1,100,000/1.15 +1,600,000/1.15^2 + 1,900,000/1.15^3 + 2,300,000/1.15^4=$830664.91
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