Determine the NPV and IRR of the following projects. Determine the project to ta
ID: 2735838 • Letter: D
Question
Determine the NPV and IRR of the following projects. Determine the project to take. The cost of project L is the height of your tallest member, in inches, times 10,000 The cost of project M is the average height of your members, in inches, times 10,000. You must show these numbers.
Data
Project L
Project M
Cost of the new project
720,000
Installation costs
$ 11,500
$ 12,000
Estimated sales price in year 1
$ 210
$ 190
Estimated unit sales in year 1
Find the unit sales where the NPV is twice the cost of each project
Variable cost per unit
$ 0.53
$ 0.55
Fixed cost year 1
$5,000
$6,000
Initial working capital needed
$13,000
$12,000
Working Capital needs % of sales
7%
8%
Depreciation method
Straight-Line
Straight-Line
Life
10
10
Salvage value
5%
15%
Tax rate
39%
39%
Beta
0.85
1.2
Risk free rate
3%
3%
Risk premium
5%
6%
Debt ratio
20%
20%
Cost of borrowing
7%
7%
Discount
14%
14%
Data
Project L
Project M
Cost of the new project
720,000
680,000Installation costs
$ 11,500
$ 12,000
Estimated sales price in year 1
$ 210
$ 190
Estimated unit sales in year 1
Find the unit sales where the NPV is twice the cost of each project
Variable cost per unit
$ 0.53
$ 0.55
Fixed cost year 1
$5,000
$6,000
Initial working capital needed
$13,000
$12,000
Working Capital needs % of sales
7%
8%
Depreciation method
Straight-Line
Straight-Line
Life
10
10
Salvage value
5%
15%
Tax rate
39%
39%
Beta
0.85
1.2
Risk free rate
3%
3%
Risk premium
5%
6%
Debt ratio
20%
20%
Cost of borrowing
7%
7%
Discount
14%
14%
Explanation / Answer
L
M
Cost of the project
720000
680000
Installation costs
11500
12000
Total cost
731500
692000
Intial working capital
13000
12000
1476000
1396000
Annual cashflows
sales
185714.29
150000
(13000/0.07)
(12000/0.08)
Variable cost
468.52
433.95
(884*0.53)
(789*0.55)
Fixed cost
5000
6000
Depreciation
73150
69200
107095.77
74366.05
Tax
42838.30629
29746.42
Cashflows after tax
64257.45943
44619.63
Plus depreciation
73150
69200
137407.4594
113819.63
PVAF(10 years,0.07)
7.0236
7.0236
Present value of inlows
965095.032
799423.553
Terminal Flows
Scrap
36000
102000
Recovery of working cap.
13000
12000
P.V.F
0.5083
0.5083
Discounted cashflows
24906.7
57946.2
NPV of the projects
L = 965095+24907-1476000 = -485998
M = 799423+57946-1396000 = -538631
Notes
1)Units sale
884.352381
789.47
(185714/210)
(150000/190)
2)
cost of the equity
(0.05*0.85+0.03)
0.0725
Cost of debt
0.07
Weighted average of the project
(0.073*0.5+0.07*0.5)
0.0715
L
M
Cost of the project
720000
680000
Installation costs
11500
12000
Total cost
731500
692000
Intial working capital
13000
12000
1476000
1396000
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