Chunky Monkey Ice Cream has a 12% cost of capital, and has generated the followi

Question

Chunky Monkey Ice Cream has a 12% cost of capital, and has generated the following information on two mutually exclusive projects. Project A will require an investment of $100,000 while the initial outlay for Project B is 2 ½ times greater: Year Project A Project B 30,000 30,000 30,000 30,000 50,000 75,000 75,000 75,000 75,000 100,000 4 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? Why? 5 points 10 points 10 points 5 points

Explanation / Answer

Payback period:

Project A = 3 + ((0-(-10000))/(20000-(-10000))

= 3 + (10000/30000)

= 3.33 years

Project B = 3 + ((0-(-25000))/(50000-(-25000))

= 3 + (25000/75000)

= 3.33 years

NPV:

Project A = $19491.82

Project B = $34543.89

Requirement c:

IRR:

At 20%, NPV = -$2244.08436 and at 19%, NPV = $110.0341

For 1% decrease in rate, NPV increases by $2354.11846(2244.08436+110.0341), for how much decrease in rate, NPV increases by $2244.08436?

Answer is 0.953258% (2244.08436/2354.11846)

IRR = 20 - 0.953258 = 19.046742%

At 18%, NPV = -$4534.44302 and at 17%, NPV = $1353.741

For 1% decrease in rate, NPV increases by $5888.18402(4534.44302+1353.741) , for how much decrease in rate, NPV increases by $4534.44302?

Answer is 0.77009% (4534.44302/5888.18402).

IRR = 18 - 0.77009 = 17.22991%

Requirement d:

Since NPV of the project B is the highest, Project B should be accepted.

Requirement a: Payback Period: Year Project A Project B Cash Flow Cumulative Cash Flow Cumulative 0 -100000 -100000 -250000 -250000 1 30000 -70000 75000 -175000 2 30000 -40000 75000 -100000 3 30000 -10000 75000 -25000 4 30000 20000 75000 50000 5 50000 70000 100000 150000

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

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