The King Corporation has two alternative projects for producing and marketing vi

Question

The King Corporation has two alternative projects for producing and marketing video game. Project A requires an initial outlay of $213,000 and will generate annual cash flows of $53,000 for 20-years. Project B requires an initial outlay of $322,000, but will generate annual cash flows of $62,000 for 20 years. It is estimated that both projects have no salvage value at the end of year 20. Firm’s RRR is 9% and the annual cash flows on both projects are already include depreciation and taxes each year. Using the given information, answer the following questions.

a. Find the NPV of project A.
b. Find the NPV of project B.
c. What is the difference of two NPVs?
d. If two projects have same NPV (that is, the difference of two NPVs is zero), what is the Firm’s RRR?

Project A Project B Intial Outlay Annaual Net Cash Flow RRR both projects Year Project A Project B 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 NPV Difference

Explanation / Answer

NPV of A = 270,812.92

NPV of B = 243,969.83

differential cash flow = cash flow B - Cash flow A

Use IRR funciton in Excel

RR at which the NPV would be same = 5.34%

Discount rate 9.0000% Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow         (213,000.000) 0                        (213,000.00)                     (213,000.00)              53,000.000 1                             48,623.85                     (164,376.15)              53,000.000 2                             44,609.04                   (119,767.107)              53,000.000 3                             40,925.72                       (78,841.38)              53,000.000 4                             37,546.54                       (41,294.85)              53,000.000 5                             34,446.36                          (6,848.48)              53,000.000 6                             31,602.17                          24,753.69              53,000.000 7                             28,992.81                          53,746.50              53,000.000 8                             26,598.91                          80,345.41              53,000.000 9                             24,402.67                       104,748.09              53,000.000 10                             22,387.77                       127,135.86              53,000.000 11                             20,539.24                       147,675.10              53,000.000 12                             18,843.34                       166,518.44              53,000.000 13                             17,287.47                       183,805.91              53,000.000 14                             15,860.06                       199,665.97              53,000.000 15                             14,550.52                       214,216.49              53,000.000 16                             13,349.10                       227,565.58              53,000.000 17                             12,246.88                       239,812.46              53,000.000 18                             11,235.67                       251,048.13              53,000.000 19                             10,307.95                       261,356.08              53,000.000 20                               9,456.84                       270,812.92

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.