Acorn Co is looking at two mutually exclusive investments. The cash flow details
ID: 2633609 • Letter: A
Question
Acorn Co is looking at two mutually exclusive investments. The cash flow details of each Project are shown in the following table.
Expected Net Cash Flow
Year
Project A
Project B
0
(300)
(405)
1
(387)
134
2
(193)
135
3
(100)
136
4
600
134
5
600
135
6
850
136
7
(180)
0
Acorn has a cost of capital of 7.5%. Should they select project A or B? Why?
If the Hurdle rate for Project B is 17.5%, would this make any difference in Acorn Co
Expected Net Cash Flow
Year
Project A
Project B
0
(300)
(405)
1
(387)
134
2
(193)
135
3
(100)
136
4
600
134
5
600
135
6
850
136
7
(180)
0
Explanation / Answer
We will be calculating NPV for both the project by multiplying the Pv factors with each cash flows and then summing it up as shown in following table:
Using IRR function in excel, we will get the IRR for project A = 18.10% and Project B = 24.25%
We can also calculate IRR using financial calculator, Enter all the cash flows in cash flow register and press IRR.
Project B has higher NPV and IRR, hence project B will be selected.
If project B has hurdle rate of 17.5%, New NPV with 17.5% will be
That means NPV is lesser as compared to Project A, so the decision will be changed and project A will be selected.
Calculation of NPV-Project A Years Cash Flows Discount Factor (7%) PV of Cash flows 0 -300 1 -300.00 1 -387 0.934579 -361.68 2 -193 0.873439 -168.57 3 -100 0.816298 -81.63 4 600 0.762895 457.74 5 600 0.712986 427.79 6 850 0.666342 566.39 7 -180 0.62275 -112.09 NPV 427.94Related Questions
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