Part 2 Problem Solving Where re- This portion of the exam should be done on work

Question

Part 2 Problem Solving Where re- This portion of the exam should be done on worksheet given. Show ea uired, show formulae and calculator inputs. No step clearly. o partial credit will be given otherwise. RIC 30 points eb Problem # 1 After the problem has been set up, the caleulator should be used to eomp and IRR. Show caleulator inputs. Chunky Monkey Ice Cream has a 12% cost of capital, and ha ally exclusive projects Project A will require an investment of $100,000 while the ute NPV s generated the following information on two mutu- B is 2 % imes greater. 85JUC Year Proiect Project B 30,000 30,000 30,000 30,000 50,000 75,000 75,000 75,000 75,000 100,000 a. Compute the payback of both projects b. Compute the NPV of both projects c. Compute the IRR of both projects. d. Which project should Chunky Monkey adopt? 5 points 10 points 10 points 5 points Why? Page 5 of 7

Explanation / Answer

project 1:

Project 2:

So, if we go by absolute value of NPV or Payback project 2 is better.

But as IRR is higher in project 1 the return rate is better in Project 1. Hence should invest in Project 1.

Discount rate r 12% Year 0 1 2 3 4 5 Production -100000 30000 30000 30000 30000 50000 NPV -100000 26785.71 23915.82 21353.41 19065.54 28371.34 Total payback value 119491.8 NPV 19491.82 Formula used NPV= Amount/ (1+ r)^year no Total Value= Sum of yearly NPV calculated IRR 19%

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