Project S has a cost of $10,000 and is expected to produce benefits (cash flows)
ID: 2578614 • Letter: P
Question
Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years.
Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years.
a). Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%.
b). Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?
Please answer both a and b by providing Excel syntax; no hand-written answers, formulas must be clear
Explanation / Answer
STEP1: COMPUTATION OF NPV OF THE PROJECTS YEAR Particulars PV @ 12% PROJECT S PROJECT L AMOUNT PRESENT VALUE AMOUNT PRESENT VALUE 0 INTIAL INVESTEMENT 1 -10000 -10000 -25000 -25000 1 CASH INFLOWS 0.89 3000 2679 7400 6607 2 CASH INFLOWS 0.80 3000 2392 7400 5899 3 CASH INFLOWS 0.71 3000 2135 7400 5267 4 CASH INFLOWS 0.64 3000 1907 7400 4703 5 CASH INFLOWS 0.57 3000 1702 7400 4199 NPV 814 1675 AS PER NPV METHOD PROJECT S IS BEST STEP2: COMPUTATION OF IRR OF BOTH THE PROJECTS YEAR Particulars PV @ 15% PROJECT S PROJECT L AMOUNT PRESENT VALUE AMOUNT PRESENT VALUE 0 INTIAL INVESTEMENT 1 -10000 -10000 -25000 -25000 1 CASH INFLOWS 0.87 3000 2609 7400 6435 2 CASH INFLOWS 0.76 3000 2268 7400 5595 3 CASH INFLOWS 0.66 3000 1973 7400 4866 4 CASH INFLOWS 0.57 3000 1715 7400 4231 5 CASH INFLOWS 0.50 3000 1492 7400 3679 NPV 56 -194 NPV = BASE RATE+ NPV1/NPV1-NPV2 * (RATE2-RATE1) NPV : PROJECT S NPV : PROJECT S 12+ (814/814-56 (15-12)) 12+(1675/1675+194(15-12)) 12+(1.074*3) 12+(0.90*3) 12+3.22 12+2.7 15.22% 14.70% STEP3: COMPUTATION OF PI OF BOTH THE PROJECTS PROFITABILITY INDEX = 1+ NPV/INTIAL INVETSMENT PROJECT S= 1+ 814/10000 1.0814 PROJECT L= 1+1675/25000 1.067
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