Year Project A Project B 1 $ 6,000,000 $20,000,000 2 10,000,000 10,000,000 3 20,
ID: 2626404 • Letter: Y
Question
Year
Project A
Project B
1
$ 6,000,000
$20,000,000
2
10,000,000
10,000,000
3
20,000,000
8,000,000
a. What are the two projects' net present values, assuming the cost of capital is 5%? Round your answers to the nearest dollar.
Project A $
Project B $
What are the two projects' net present values, assuming the cost of capital is 10%? Round your answers to the nearest dollar.
Project A $
Project B $
What are the two projects' net present values, assuming the cost of capital is 15%? Round your answers to the nearest dollar.
Project A $
Project B $
b. What are the two projects' IRRs at these same costs of capital? Round your answers to two decimal places.
Project A %
Project B %
2.Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $23,000, whereas the gas-powered truck will cost $17,100. The cost of capital that applies to both investments is 11%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,500 per year and those for the gas-powered truck will be $4,950 per year. Annual net cash flows include depreciation expenses.
a. Calculate the NPV for each type of truck. Round your answers to the nearest dollar.
Electric-powered truck
$
Gas-powered truck
$
b. Calculate the IRR for each type of truck. Round your answers to two decimal places.
Electric-powered truck
%
Gas-powered truck
%
3.Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below:
Year
X
Y
0
-$5,000
-$5,000
1
1000
4,500
2
1500
1500
3
2000
1000
4
4000
500
The projects are equally risky, and their cost of capital is 15%. You must make a recommendation, and you must base it on the modified IRR (MIRR). Calculate the two projects' MIRRs. Round your answers to two decimal places.
Project X %
Project Y %
Year
Project A
Project B
1
$ 6,000,000
$20,000,000
2
10,000,000
10,000,000
3
20,000,000
8,000,000
Explanation / Answer
1. Your division is considering two investment projects, each of which requires an up-front expenditure of $23 million. You estimate that the investments will produce the following net cash flows:
Year
Project A
Project B
1
$ 6,000,000
$20,000,000
2
10,000,000
10,000,000
3
20,000,000
8,000,000
a. What are the two projects' net present values, assuming the cost of capital is 5%? Round your answers to the nearest dollar.
Project A = -23000000 + 6000000/1.05 + 10000000/1.05^2 + 20000000/1.05^3=$9061332
Project B = -23000000 + 20000000/1.05 + 10000000/1.05^2 + 8000000/1.05^3=$12028615
What are the two projects' net present values, assuming the cost of capital is 10%? Round your answers to the nearest dollar.
Project A = -23000000 + 6000000/1.1 + 10000000/1.1^2 + 20000000/1.1^3=$5745304
Project B = -23000000 + 20000000/1.1 + 10000000/1.1^2 + 8000000/1.1^3=$9456799
What are the two projects' net present values, assuming the cost of capital is 15%? Round your answers to the nearest dollar.
Project A = -23000000 + 6000000/1.15 + 10000000/1.15^2 + 20000000/1.15^3=$2929153
Project B = -23000000 + 20000000/1.15 + 10000000/1.15^2 + 8000000/1.15^3=$7212871
b. What are the two projects' IRRs at these same costs of capital? Round your answers to two decimal places.
Project A 21.18%
Project B 37.15%
2.Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $23,000, whereas the gas-powered truck will cost $17,100. The cost of capital that applies to both investments is 11%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,500 per year and those for the gas-powered truck will be $4,950 per year. Annual net cash flows include depreciation expenses.
a. Calculate the NPV for each type of truck. Round your answers to the nearest dollar.
NPV of Electric-powered truck = -23000 + 6500*(1-1/1.11^6)/11%= 4499
NPV of Gas-powered truck = -17100 + 4950*(1-1/1.11^6)/11%= 3841
Electric-powered truck
$ 4499
Gas-powered truck
$ 3841
b. Calculate the IRR for each type of truck. Round your answers to two decimal places.
Electric-powered truck
17.55%
Gas-powered truck
18.49%
3.Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below:
Year
X
Y
0
-$5,000
-$5,000
1
1000
4,500
2
1500
1500
3
2000
1000
4
4000
500
The projects are equally risky, and their cost of capital is 15%. You must make a recommendation, and you must base it on the modified IRR (MIRR). Calculate the two projects' MIRRs. Round your answers to two decimal places.
Project X = ((1000*1.15^3 + 1500*1.15^2 + 2000*1.15 + 4000)/5000)^(1/4)-1 = 18.34%
Project Y = ((4500*1.15^3 + 1500*1.15^2 + 1000*1.15 + 500)/5000)^(1/4)-1 = 20.32%
Year
Project A
Project B
1
$ 6,000,000
$20,000,000
2
10,000,000
10,000,000
3
20,000,000
8,000,000
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