save & E ! Question 8 (ot 30) 8. Company is presented with the following two mut
ID: 2795320 • Letter: S
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save & E ! Question 8 (ot 30) 8. Company is presented with the following two mutusally exclusive projects. The required return for both projects is 19 $140,000 355,000 63,500152,500 81,500 180 000 T2 500 110 000 10,000 58,500 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.) Projpct M Project N b. What is the NPV for each project? (Do not round intermediate calcul ations and round your answers to 2 decimal places, e.g., 32.16.) Project M Project N c. Whrich, f either, of the projects should the company accepr? (Click to selec)Explanation / Answer
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IRR Project M
Internal rate of return is the rate at which if we discount all the future cash flows, the resulting NPV will be zero, it is minimum rate of return that management seeks from the project, IRR of the asset/project must be greater than the required rate of return, otherwise it will not be feasible for the management to accept the project. Best way to calculate IRR is using Excel.
Year
Cash flow
0
-140000
1
63500
2
81500
3
72500
4
58500
IRR
34.47%
Formula
=IRR(J21:J31)
IRR Project N
Year
Cash flow
0
-355000
1
152500
2
180000
3
137500
4
110000
IRR
24.61%
Formula
=IRR(J21:J31)
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NPV Project M
NPV is the difference between present value of all cash inflow and initial cost of asset or project.
All the future cash flows are discounted using discounting rate or required rate and the sum of all the discounted cash flows will be subtracted with initial cost.
NPV = PV of future cash inflow - initial cost
Pls refer below table for NPV calculation,
Year
Cash Inflow
PV factor
PV of cash flow
1
63500
0.84034
53361.34454
2
81500
0.70616
57552.43274
3
72500
0.59342
43022.64653
4
58500
0.49867
29172.12196
Total
183108.5458
Initial cost
140000
NPV
43108.55
Decision rule for NPV is that project is accepted if NPV is positive and rejected if it is in negative
NPV of Project N
Year
Cash Inflow
PV factor
PV of cash flow
1
152500
0.84034
128151.2605
2
180000
0.70616
127109.6674
3
137500
0.59342
81594.67445
4
110000
0.49867
54853.56265
Total
391709.165
Initial cost
355000
NPV
36709.165
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Hope this answer your query.
Feel free to comment if you need further assistance. J
Year
Cash flow
0
-140000
1
63500
2
81500
3
72500
4
58500
IRR
34.47%
Formula
=IRR(J21:J31)
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