1a) Delta LLC is looking at two mutually exclusive investments. The quarterly ca
ID: 2755147 • Letter: 1
Question
1a) Delta LLC is looking at two mutually exclusive investments. The quarterly cash flows of each Project are shown in the following table.
Expected Net Cash Flow
Period
Project A
Project B
0
(800)
(900)
1
400
135
2
(193)
700
3
800
(250)
4
600
300
5
600
400
6
850
0
7
(180)
100
Delta has a cost of capital of 9%. Should they select project A or B? Why? (please show your work)
1b) If the cost of capital for both Project A and Project B is 14%, would this make any difference in Delta’s decision making? Why or why not? (Please show your work)
Expected Net Cash Flow
Period
Project A
Project B
0
(800)
(900)
1
400
135
2
(193)
700
3
800
(250)
4
600
300
5
600
400
6
850
0
7
(180)
100
Explanation / Answer
1(a) Discount rate = 9%/4 = 2.25%
Statement showing calculation of NPV pf Project A and B
Project A Project B
Project A shoul be choosen
(b) Discount Rate = 14%/4 = 3.50%
Statement showing calculation of NPV
Project A Project B
Decision will remain same i.e project A should be selected
Particulars Time PVF Amount PV Amount PV Cash outflows 0 1 800 800 900 900 P.V of cash outflows (A) 800 900 Cash inflows 1 0.978 400 391.20 135 132.03 2 0.956 (193) (184.51) 700 669.20 3 0.935 800 748 )250) (233.75) 4 0.915 600 549 300 274.5 5 0.895 600 537 400 358 6 0.875 850 743.75 0 0 7 0.856 (180) (154.08) 100 85.60 P.V. of cash Inflows (B) 2630.36 1285.58 NPV (B-A) 1830.36 385.58Related Questions
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