MUST SHOW WORK AND HOW YOUR GOT HTE ANSWERS!! Good old XYZorp (they\'re back!)?

ID: 2712195 • Letter: M

Question

MUST SHOW WORK AND HOW YOUR GOT HTE ANSWERS!! Good old XYZorp (they're back!)? is considering two mutually exclusive projects, A & B in order to expand their product line.? After letting the cost accountants out of their cages, it was determined that project A's initial investment must be $42,400, while project B will cost $60,000. Project A has projected cash inflows of $25,000 per year for three years.? Project B's inflows are more variable:? $10,000 in year 1; $30,000 in year 2; and $40,000 in its final year. The firm's cost of capital is 12%.? YES - this IS important! Using NPV analysis, if the NPV for project? B = + $ 1,320 (yes, I did the computation for you!), which project do you prefer?? In other words - which project will have the higher NPV. P-3. Given the information for project A in problem P-2, what is this project's IRR?

Explanation / Answer

The net present value of project A is as follows:

Year

Cash flow

Discount rate@12%

Discounted cash flow

-42,400

1.00

-42,400.00

25,000

2.40

60,045.00

17,645.00

The net present value of project B is as follows:

It is already given as $1,320

Analysis:

The project A is should be preferred as it has higher net present value.

The IRR of the project A is as follows:

=42,400/17,645

=2.4029

Now, verify the 2.4029 value in the annuity table.

From the annuity table; the project’s IRR is 12%.