chp. 10 p-10-25-All techiniques with NVP profile: Matually exclusive projects A

Question

chp. 10 p-10-25-All techiniques with NVP profile: Matually exclusive projects A and B, of equal risk, are alternatives for expanding Rosa Companys capacity. The firms cost of capital is 13%. The cash flow for project is in the following table,. a). Calculate each projects payment period. b). Calculate the net present value (NPV) for each project. c). Calculate the internal rate of return (IRR) for each project. d). Draw the nextpresent value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR. e).Summerize the prefererences dictated by each mesure, and indicate which project you would recommend. Explain why. Project A ProjectB.

Initial investments (CFo) $80,000 $50,000

Years Cash inflows (CFi)

1 $15,000 $15,000   

2 $20,000 $15,000

3 25,000 15,000

4 30,000 15,000

5 35,000 15,000

Explanation / Answer

Year CF A CF B PV A PV B Cumilative CF A 0 -80000 -50000 -80000 1 15000 15000 13274.34 13274.34 -65000 2 20000 15000 15662.93 11747.2 -45000 3 25000 15000 17326.25 10395.75 -20000 4 30000 15000 18399.56 9199.781 10000 5 35000 15000 18996.6 8141.399 45000 83659.68 52758.47 r 0.13 NPV A 3659.684 Accept NPV B 2758.469 Reject IRR A 15% IRR B 15% Pay back period A 3.666667 Years Reject Pay back period B 3.333333 Years Accept Project A is accepted as its NPV is higher than B

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