Reece Company is presented with the following two mutually exclusive projects. T

Question

Reece Company is presented with the following two mutually exclusive projects. The required return for both projects is 14 percent. Year Project M Project N -$137,000 -$358,000 151,000 183,000 136,000 113,000 63,800 81,800 72,800 58,800 2 4 a. What is the IRR for each project? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) IRR Project M Project N b. What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV Project M Project N c. Which, if either, of the projects should the company accept? (Click to select)

Explanation / Answer

CALCULATION OF PRESENT VALUE OF THE PROJECT M Years Cash Flows PVF @ 14% Present Value 0 -$1,37,000 1 -$1,37,000.00 1 $63,800 0.8772 $55,964.91 2 $81,800 0.7695 $62,942.44 3 $72,800 0.6750 $49,137.93 4 $58,800 0.5921 $34,814.32 Net Present Value $65,859.60 Answer = Net Present Value = $65,859.60 CALCULATION OF PRESENT VALUE OF THE PROJECT N Years Cash Flows PVF @ 14% Present Value 0 -$3,58,000 1 -$3,58,000.00 1 $1,51,000 0.8772 $1,32,456.14 2 $1,83,000 0.7695 $1,40,812.56 3 $1,36,000 0.6750 $91,796.13 4 $1,13,000 0.5921 $66,905.07 Net Present Value $73,969.90 Answer = Net Present Value = $73,969.90 IRR : IRR Means with a particular Percentage rate OF return at that point the present value of the cash flow become 0 or negiligble CALCUALTION OF THE IRR OF PROJECT M So we calculate NPV with random rate of interest and try to acieve the minimum NPV Years Cash Flows PVF @ 36% Present Value 0 -$1,37,000 1 -$1,37,000.00 1 $63,800 0.7353 $46,911.76 2 $81,800 0.5407 $44,225.78 3 $72,800 0.3975 $28,941.07 4 $58,800 0.2923 $17,187.86 Net Present Value $266.47 Years Cash Flows PVF @ 37% Present Value 0 -$1,37,000 1 -$1,37,000.00 1 $63,800 0.7299 $46,569.34 2 $81,800 0.5328 $43,582.50 3 $72,800 0.3889 $28,311.94 4 $58,800 0.2839 $16,691.49 Net Present Value -$1,844.72 In the given case the pv with 36% is coming to postive means the present value is POSITIVIE but with 37 Present value cash flow become negative so the IRR of the project is between 36% and 37% So the differecne in both the net present value is = $266.47 - -$1,844.72 Total is become = $2,111.20 So , the difference % = $266.47 /' $2,111.20 So , the difference % = 0.13 So, the IRR = 36.13% Answer = IRR = 36.13% CALCUALTION OF THE IRR OF PROJECT N So we calculate NPV with random rate of interest and try to acieve the minimum NPV Years Cash Flows PVF @ 24% Present Value 0 -$3,58,000 1 -$3,58,000.00 1 $1,51,000 0.8065 $1,21,774.19 2 $1,83,000 0.6504 $1,19,016.65 3 $1,36,000 0.5245 $71,330.27 4 $1,13,000 0.4230 $47,796.02 Net Present Value $1,917.13 Years Cash Flows PVF @ 25% Present Value 0 -$3,58,000 1 -$3,58,000.00 1 $1,51,000 0.8000 $1,20,800.00 2 $1,83,000 0.6400 $1,17,120.00 3 $1,36,000 0.5120 $69,632.00 4 $1,13,000 0.4096 $46,284.80 Net Present Value -$4,163.20 In the given case the pv with 36% is coming to postive means the present value is POSITIVIE but with 37 Present value cash flow become negative so the IRR of the project is between 36% and 37% So the differecne in both the net present value is = $1,917.13 - -$4,163.20 Total difference in both interest rate is come = $6,080.33 So , the difference % of the both interest rate = $1,917.13 /' $6,080.33 So , the difference % of the both interest rate = 0.32 So, the IRR = 24.32% Answer = 24.32% Answer A) IRR PROJECT M 36.13% PROJECT N 24.32% ANSWER B) NET PRESENT VALUE PROJECT M $65,859.60 PROJECT N $73,969.90 ANSWER C) Project M will be accepted because the IRR of the Project M is greater then Project N

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