You are considering two independent projects A a project B. The intitial cash ou
ID: 2389314 • Letter: Y
Question
You are considering two independent projects A a project B. The intitial cash outlay associatedwith project A is $50,000 and the initial cash outlay associated with project B is $70,000. The
required rate of return on both projects is 12 percent. The expected annual free cash flows from
each project are as follows:
Year Project A Project B
0 ($50,000) ($70,000)
1 12,000 13,000
2 12,000 13,000
3 12,000 13,000
4 12,000 13,000
5 12,000 13,000
6 12,000 13,000
Calculate the NPV, PI, and IRR for each project and indicate if the project should be accepted.
Explanation / Answer
Year
PROJECT A
PV---12%
Year
PROJECT B
PV---12%
0
-50000
-50,000
0
-70000
-70000
1
12000
10714.29
1
13000
11607.14
2
12000
9566.33
2
13000
10363.52
3
12000
8541.36
3
13000
9253.14
4
12000
7626.22
4
13000
8261.74
5
12000
6809.12
5
13000
7376.55
6
12000
60779.57
6
13000
6586.20
Total present
49336.89
Total present
53448.30
NPV
-663.11
NPV
-16551.70
IRR
11.53%
IRR
3.18%
PI
0.99
PI
0.76
Both the projects should be rejected
as they have negative NPV, IRR is less than the required rate of return and PI is less than 1.
Year
PROJECT A
PV---12%
Year
PROJECT B
PV---12%
0
-50000
-50,000
0
-70000
-70000
1
12000
10714.29
1
13000
11607.14
2
12000
9566.33
2
13000
10363.52
3
12000
8541.36
3
13000
9253.14
4
12000
7626.22
4
13000
8261.74
5
12000
6809.12
5
13000
7376.55
6
12000
60779.57
6
13000
6586.20
Total present
49336.89
Total present
53448.30
NPV
-663.11
NPV
-16551.70
IRR
11.53%
IRR
3.18%
PI
0.99
PI
0.76
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