NPV Your division is considering two projects with the following cash flows (in
ID: 2642943 • Letter: N
Question
NPV
Your division is considering two projects with the following cash flows (in millions):
1. What are the projects' NPVs assuming the WACC is 5%? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.
Project A $ ________ million
Project B $ ________ million
2. What are the projects' NPVs assuming the WACC is 10%? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.
Project A $ ________ million
Project B $ ________ million
3. What are the projects' NPVs assuming the WACC is 15%? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.
Project A $ ________ million
Project B $ ________ million
4. What are the projects' IRRs assuming the WACC is 5%? Round your answer to two decimal places.
Project A ________ %
Project B ________ %
5. What are the projects' IRRs assuming the WACC is 10%? Round your answer to two decimal places.
Project A ________ %
Project B ________ %
6. What are the projects' IRRs assuming the WACC is 15%? Round your answer to two decimal places.
Project A ________ %
Project B ________ %
Explanation / Answer
NPV of the project = Present value of all cash inflows - initial investment
1.
NPV of Project A = 7/1.05 + 9/1.05^2 +10/1.05^3 - 16 = $7.47 Million
NPV of Project B =14/1.05 + 20/1.05^2 + 11/1.05^3 - 26 = $14.98 million
2
NPV of Project A = 7/1.10 + 9/1.10^2 +10/1.10^3 - 16 =$5.32 Million
NPV of Project B =14/1.10 + 20/1.10^2 + 11/1.10^3 - 26 = $11.52 Million
3.
NPV of Project A = 7/1.15 + 9/1.15^2 +10/1.15^3 - 16 = $3.47 Million
NPV of Project B =14/1.15 + 20/1.15^2 + 11/1.15^3 - 26 = $8.53 Million
IRR is the discount rate at which present value of cash inflow will be equal to present value of cash outflows. there will be one IRR of the project and it will not change with change in WACC.
So answer of Q. 4, 5 and 6 will remain same.
for Project A:
at R = 27%
NPV = -.0262 Million and PV of cash inflow = 15.973 M
At R = 26% , NPV = .2235 Million and PV of cash inflow = 16.223 M
through the method of interpolation
IRR for Project A = 26% + (27%-26%)*(16.2235 - 16) /(16.2235 - 15.973) = 26% + .89% = 26.89%
for Project B:
At R = 34% PV of cash inflow = 26.157 Million
At R= 35% PV of cash inflow = 25.815 Million
through the method of interpolation
IRR of Project B = 34% + (35% - 34%)*(26.157 - 26)/(26.157 - 25.815) = 34%+.46% = 34.46%
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