Year A B 0 -75,000 -75,000 1 40,000 10,000 2 27,000 152,000 3 20,000 67,967 a. W
ID: 2652113 • Letter: Y
Question
Year A B 0 -75,000 -75,000 1 40,000 10,000 2 27,000 152,000 3 20,000 67,967 a. Which project would you select if you used the dicounted pay back method using an 8% discount? Why/ b. What is the net present value (NPV) at 8% and internal rate of return (IRR) methods of both projects? Which would you recommend and why Year A B 0 -75,000 -75,000 1 40,000 10,000 2 27,000 152,000 3 20,000 67,967 a. Which project would you select if you used the dicounted pay back method using an 8% discount? Why/ b. What is the net present value (NPV) at 8% and internal rate of return (IRR) methods of both projects? Which would you recommend and whyExplanation / Answer
Discounted payback period = 2+ (14814.62/15876.60)
= 2+ .93
= 2.93 years
Project B
discounted payback period = 1 + (65740.74/130315.5)
= 1+ .50
= 1.50 years
On the basis of discounted payback period project B is recommended.
b)NPV= Present value of net cash flow - Initial investment
NPV of project A= $ 1,061.98 [from Table 1]
NPV of project B= $ 118,529.16 [From table 2]
IRR:We will select two rate which give present value one above Initial investment and one below it
IRR = LDR +[(Present value@LDR-Initial investment)(HDR-LDR)/(Present value at LDR-Present value at HDR)]
project A=
At 8% =Present value of cash flow-=76061.98
At 10 % present value = 73703.98
IRR= 8 % +[(76061.98-75000)(10%-8%)/(76061.98-73703.98)]
= 8% + [( 1061.98*2)/2358]
= 8% + [2123.98 /2358]
= 8% + .9%
= 8.9 %
IRR of project B=
Present value @ 8% =193529.16
Present value @70% = 72311.62
IRR =8% +[(193529.16-75000)(70-8)/(193529.16-72311.62)]
= 8% + [(118529.16*62)/121217.54]
= 8% + [7348807.92/121217.54]
8% +60.62
=68.62%
So on the basis of NPV and IRR project B is recommended as it has higher NPV and IRR than project A.
**I believe , there is mistake in this question in project B year 2 cash flow -152000 (I think it should be15200)
still I have provided solution by taking 152000.
Year cash flow present value @8% Discounted cash flow cummulative discounted cash flow 0 (75000) 1 (75000) (75000) 1 40000 .92593 37037.2 (37962.80) 2 27000 .85734 23148.18 (14814.62) 3 20000 .79383 15876.60 NPV 1061.98Related Questions
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