NPV Your division is considering two investment projects, each of which requires
ID: 2771358 • Letter: N
Question
NPV
Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows:
What are the two projects' net present values, assuming the cost of capital is 5%? Round your answers to the nearest dollar.
Project A $
Project B $
What are the two projects' net present values, assuming the cost of capital is 10%? Round your answers to the nearest dollar.
Project A $
Project B $
What are the two projects' net present values, assuming the cost of capital is 15%? Round your answers to the nearest dollar.
Project A $
Project B $
What are the two projects' IRRs at these same costs of capital? Round your answers to two decimal places.
Project A %
Project B %
Explanation / Answer
A. Calculation of NPV when Cost of Capital is 5% Project A Year 0 Year 1 Year 2 Year3 Initial Investment -1,50,00,000 Year wise Cashflow 60,00,000 1,00,00,000 2,00,00,000 Net Cash flow (i) -1,50,00,000 60,00,000 1,00,00,000 2,00,00,000 Present Value factor at 5% (ii) 1 0.952 0.907 0.864 Present Value (i * ii) -1,50,00,000 57,14,286 90,70,295 1,72,76,752 NPV = adding all year cashflows 1,70,61,332 Project B Year 0 Year 1 Year 2 Year3 Initial Investment -1,50,00,000 Year wise Cashflow 2,00,00,000 1,00,00,000 60,00,000 Net Cash flow (i) -1,50,00,000 2,00,00,000 1,00,00,000 60,00,000 Present Value factor at 5% (ii) 1 0.952 0.907 0.864 Present Value (i * ii) -1,50,00,000 1,90,47,619 90,70,295 51,83,026 NPV = adding all year cashflows 1,83,00,939 B. Calculation of NPV when Cost of Capital is 10% Project A Year 0 Year 1 Year 2 Year3 Initial Investment -1,50,00,000 Year wise Cashflow 60,00,000 1,00,00,000 2,00,00,000 Net Cash flow (i) -1,50,00,000 60,00,000 1,00,00,000 2,00,00,000 Present Value factor at 10% (ii) 1 0.909 0.826 0.751 Present Value (i * ii) -1,50,00,000 54,54,545 82,64,463 1,50,26,296 NPV = adding all year cashflows 1,37,45,304 Project B Year 0 Year 1 Year 2 Year3 Initial Investment -1,50,00,000 Year wise Cashflow 2,00,00,000 1,00,00,000 60,00,000 Net Cash flow (i) -1,50,00,000 2,00,00,000 1,00,00,000 60,00,000 Present Value factor at 10% (ii) 1 0.909 0.826 0.751 Present Value (i * ii) -1,50,00,000 1,81,81,818 82,64,463 45,07,889 NPV = adding all year cashflows 1,59,54,170 C. Calculation of NPV when Cost of Capital is 15% Project A Year 0 Year 1 Year 2 Year3 Initial Investment -1,50,00,000 Year wise Cashflow 60,00,000 1,00,00,000 2,00,00,000 Net Cash flow (i) -1,50,00,000 60,00,000 1,00,00,000 2,00,00,000 Present Value factor at 15% (ii) 1 0.870 0.756 0.658 Present Value (i * ii) -1,50,00,000 52,17,391 75,61,437 1,31,50,325 NPV = adding all year cashflows 1,09,29,153 Project B Year 0 Year 1 Year 2 Year3 Initial Investment -1,50,00,000 Year wise Cashflow 2,00,00,000 1,00,00,000 60,00,000 Net Cash flow (i) -1,50,00,000 2,00,00,000 1,00,00,000 60,00,000 Present Value factor at 15% (ii) 1 0.870 0.756 0.658 Present Value (i * ii) -1,50,00,000 1,73,91,304 75,61,437 39,45,097 NPV = adding all year cashflows 1,38,97,838 D. IRR Calculation For Prject A 47% For Prject B 82% IRR= Ra + (NPVa/(NPVa-NPVb))*(Rb-Ra) where Ra is the discount rate that gives the positive net present value, NPVa is the positive NPV, NPVb is the negative NPV and Rb is the discount rate that gives the negative NPV.
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