Valley Corporation is attempting to select the best of a group of independent pr
ID: 2771974 • Letter: V
Question
Valley Corporation is attempting to select
the best of a group of independent projects competing for the firm’s fixed capital budget of $4.5 million. The firm recognizes that any unused portion of this budget will earn less than its 15% cost of capital, thereby resulting in a present value of inflows that is less than the initial investment. The firm has summarized, in the following table, the key data to be used in selecting the best group of projects.
Project - Initial investment - IRR - Present value of inflows at 15%
A: -$5,000,000, 17%, $5,400,000
B: -800,000, 18%, 1,100,000
C: -2,000,000, 19%, 2,300,000
D: -1,500,000, 16%, 1,600,000
E: -800,000, 22%, 900,000
F: -2,500,000, 23%, 3,000,000
G: -1,200,000, 20%, 1,300,000
a. Use the internal rate of return (IRR) approach to select the best group of projects.
b. Use the net present value (NPV) approach to select the best group of projects.
c. Compare, contrast, and discuss your findings in parts a and b.
d. Which projects should the firm implement? Why?
Explanation / Answer
Solution.
A. Use the internal rate of return (IRR) approach to select the best group of projects.
investment IRR Inflow
E: - 800,000, 22%, 900,000
F: - 2,500,000, 23%, 3,000,000
G: - 1,200,000, 20%, 1,300,000
Total $4,500,000 $5,200,000
B. Use the net present value (NPV) approach to select the best group of projects.
investment IRR Inflow/N.P.V
C: - 2,000,000, 19%, 2,300,000
F: - 2,500,000, 23%, 3,000,000
Total $4,500,000 $5,300,000
C. Compare, contrast, and discuss your findings in parts a and b.
Part A in this part project E,F,G Has maximum IRR and also maximum retun inflow Comprision than othert we can get maximum return from investment.
Part B As per NPV project C and F Return maximum inflow NPV on the invest ment of $4,500,000. so we can invest in this both of project.
D. Which projects should the firm implement? Why?
firm should have been invest in higher IRR giver project. Because IRR show capablity of return on investment of project and firm can get continiusly return at this rate in future. so this is more profitable.
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