2) A company is seeking to invest approximately $100 millions in new projects. A
ID: 2795065 • Letter: 2
Question
2) A company is seeking to invest approximately $100 millions in new projects. After research three projects are considered candidates for construction. The after tax cash flow information for the three projects using a ten years operating life is, Land Salvage Initial Investment millions After ta;x cash flovw ears l-10 WC S10 $50 $100 $80 Project A Proiect B Proiect C Assume Initial investment at time zero and yearly cash flow at end of the 10 year plant operation. The minimum discount (interest) rate for the project has been set to 10% Calculate: NPV (cumulative cash), DPBP (payback period), and DCFROR (interest rate) for each project. Determine which should be preferred $15 $10 $10 $10 $10 $20 S10Explanation / Answer
The conclusion of all methods project a to be preferred NPV a b C Initial Investment (A) 50 100 80 Cash Flow 15 20 12 Discount factor for 10 year 6.1446 6.1446 6.1446 PV of annual cash inflow (B) 92.17 122.89 73.73 Inflow at the end of the project 10 20 30 Discount factor of 10th year 0.3855 0.3855 0.3855 PV of the residual value (C ) 3.86 7.71 11.57 NPV (B+C-A) 46.02 30.60 5.30 As per NPV Option a is to be preferred Discount Factor 10% Year 1/(1+.1)^n 1 0.9091 2 0.8264 3 0.7513 4 0.6830 5 0.6209 6 0.5645 7 0.5132 8 0.4665 9 0.4241 10 0.3855 Total 6.1446 Payback Period a b c Initial Investment (A) 50 100 80 Annual Inflow (B) 15 20 12 Payback period years (A/B) 3.33 5.00 6.67 As per DPBP Option a is to be preferred as lesser recovery period IRR DCFROR a b C Initial Investment 50 100 80 Cash Flow 15 20 12 Discount factor for 10% 6.1446 6.1446 6.1446 Discount factor for 30% 3.0915 3.0915 3.0915 PV of annual cash inflow 10% 92.17 122.89 73.73 PV of annual cash inflow 30% 46.37 61.83 37.10 Inflow at the end of the project 10 20 30 Discount factor of 10% 0.3855 0.3855 0.3855 Discount factor of 30% 0.0725 0.0725 0.0725 PV of the residual value 10% 3.86 7.71 11.57 PV of the residual value 30% 0.73 1.45 2.18 NPV10% 46.02 30.60 5.30 NPV30% -2.90 -36.72 -40.73 As per NPV Option a is to be preferred IRR 10+46.02/(46.02+2.9)*(30-10) 10+30.6/(30.6+36.72)*(30-10) 10+5.3/(5.3+40.73)*(30-10) 28.81% 19.09% 12.30% As per DCFROR project a is to be prreferred Dis. Fact 10% 30% Year 1/(1+.1)^n 1/(1+.30)^n 1 0.9091 0.7692 2 0.8264 0.5917 3 0.7513 0.4552 4 0.6830 0.3501 5 0.6209 0.2693 6 0.5645 0.2072 7 0.5132 0.1594 8 0.4665 0.1226 9 0.4241 0.0943 10 0.3855 0.0725 Total 6.1446 3.0915
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.