12.00% 15.53% 18.62% 19.08% 20.46% Green Grocers is deciding among two mutually

Question

12.00%

15.53%

18.62%

19.08%

20.46%

Green Grocers is deciding among two mutually exclusive projects. The two projects have the following cash flows:

Project A

Project B

Year

Cash Flow

Cash Flow

0

-$50,000

-$30,000

1

10,000

6,000

2

15,000

12,000

3

40,000

18,000

4

20,000

12,000

The company's cost of capital is 10 percent (WACC = 10%). What is the net present value (NPV) of the project with the highest internal rate of return (IRR)?

$ 7,090

$ 8,360

$11,450

$12,510

$15,200

Braun Industries is considering an investment project which has the following cash flows:

Year

Cash Flow

0

-$1,000

1

400

2

300

3

500

4

400

The company's WACC is 10 percent. What is the project's payback, internal rate of return, and net present value?

Payback = 2.4, IRR = 10.00%, NPV = $600.

Payback = 2.4, IRR = 21.22%, NPV = $260.

Payback = 2.6, IRR = 21.22%, NPV = $300.

Payback = 2.6, IRR = 21.22%, NPV = $260.

Payback = 2.6, IRR = 24.12%, NPV = $300.

a.

12.00%

b.

15.53%

c.

18.62%

d.

19.08%

e.

20.46%

Explanation / Answer

Solution :

The cash flows for 1 st question is not visible , therefore I am answering 2 and 3 questions only:

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2) The present value of cash flows

Answer is E : $ 15,200

To calculate IRR of project A

$ 15,200.46 = $ 10,000/(1+r)1 + $ 15,000/(1+r)2 + $ 40,000/(1+r)3 + $ 20,000/(1+r)4

Annuity = $ 85,000/4

Annuity = $ 21,250

Pay back period = $ 50,000/$21250

Pay back period = 2.35

Consulting the table for Present Value Interest Factor for an annuity (PVIFA), we find that for n = 4 years, the value nearest to 2.35 is which corresponds to a discounting factor of 25 %.

At 25% discount factor

The Net present value is shown below

$46,272.00

Net present value = - $ 50,000+ $ 46,272.00

NPV = -3728

At 22% the NPV

NPV = -$50,000+49330.91

NPV = -$ 669.09

At 21%

NPV = -$ 50,000+50418.77

NPV = 418.77

IRR = 21 % + 50418.77 - 50,000/50418.77 - 49330.91

IRR = 21.38

--------------------------

IRR of Project B

Annuity = $ 48,000/4

Annuity = $12000

Pay back period = 30,000/12000

Pay back period = 2.5

Consulting the table for Present Value Interest Factor for an annuity (PVIFA), we find that for n = 4 years, the value nearest to 2.5 is which corresponds to a discounting factor of 22%

At 20%

The NPV = -$ 462.96

At 19%

NPV = $ 181.50

IRR = 19+ 30181-30000/30181- 29537.04

IRR = 19.28

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3) Answer is : Payback = 2.6, IRR = 21.22%, NPV = $260

To calculate pay back period

Pay back year = 2

Pay back period = 2 + 1000-700/500

Pay back period = 2.6 years

To calculate NPV

NPV = -$ 1000+$ 1260

NPV = 260

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To calculate IRR

Annuity = 1600/5

Annuity = 320

Pay back period= 1000/320

Pay back period= 3.125

At 21%

NPV at 21% = 4.32

At 22%

1004.322466

NPV at 22% = 14.66

IRR = 21 + 1004.32-1000/1004.32 - 985.34

IRR = 21.29 %

Project A year cash flows present value of cash flows 0 ($50,000) 1 $10,000 $9,090.91 2 $15,000 $12,396.69 3 $40,000 $30,052.59 4 $20,000 $13,660.27 $65,200.46 Net present value of Project A = -$50,000+$65200.46 NPV of Project A = $ 15,200.46 Project B year cash flows present value of cash flows 0 ($30,000) 1 $6,000.00 $5,454.55 2 $12,000.00 $9,917.36 3 $18,000.00 $13,523.67 4 $12,000.00 $8,196.16 $37,091.73 Net present value of Project B = -$ 30000+$37091.73 NPV of project B = $ 7091.73

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