Mahjong, Inc., has identified the following two mutually exclusive projects: Req

Question

Mahjong, Inc., has identified the following two mutually exclusive projects:

Required:

(a) What is the IRR for Project A? (17.78%, 17.44%, 16.42%, 16.08%, 16.93%)

(b) What is the IRR for Project B? (14.45%,14.88%,14.02%,13.73%,15.17%)

(c) If the required return is 8 percent, what is the NPV for Project A? (7158.9,6800.95,7373.67,6944.13,7516.84)

(d) If the required return is 8 percent, what is the NPV for Project B? (7267.15, 6903.79, 7485.16,7049.14, 7630.51)

(e) At what discount rate would the company be indifferent between these two projects? (8.31%,7.89%,8.06%,8.73%,8.56%)

Please select 1 from each bracket.

Year Cash Flow (A) Cash Flow (B) 0 –$40,000        –$40,000        1 19,300        5,700        2 14,800        12,200        3 12,300        18,700        4 9,300        22,700

Explanation / Answer

Year Cash flow A Let Discount rate= 10% Present value @10% Let Discount rate= 15% Present value @15% 1 19300 0.909 17543.7 0.869 16771.7 2 14800 0.826 12224.8 0.756 11188.8 3 12300 0.751 9237.3 0.657 8081.1 4 9300 0.638 5933.4 0.572 5319.6 Total Present value of Cash inflow 44939.2 41361.2 IRR=10%+ (44939.2-40000)/(44939.2-41361.2) * (15-10)% 10%+(4939.2/3578)*5% 16.93% Year Cash Flow B Discount Rate @ 10% Present value @10% Let Discount rate= 15% Present value @15% 1 5700 0.909 5181.3 0.869 4953.3 2 12200 0.826 10077.2 0.756 9223.2 3 18700 0.751 14043.7 0.657 12285.9 4 22700 0.638 14482.6 0.572 12984.4 Total Present value of Cash inflow 43784.8 39446.8 IRR=10% + (43784.8-40000)/43784.8-39446.8)*(15-10)% 10%+(3784.8/4338)*5% 14.45% Year Cash flow A Let Discount rate= 8% Present value 1 19300 0.925 17852.5 2 14800 0.856 12668.8 3 12300 0.793 9753.9 4 9300 0.735 6835.5 Total Present value of Cash inflow 47110.7 Cash outflow 40000 Net Present Value 7110.7 NPV of A= 7158.9 Year Cash Flow B Let Discount rate= 8% Present value 1 5700 0.925 5272.5 2 12200 0.856 10443.2 3 18700 0.793 14829.1 4 22700 0.735 16684.5 Total Present value of Cash inflow 47229.3 Cash outflow 40000 Net Present Value 7229.3 NPV of B=7267.15

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