Camino Technologies is evaluating two mutually exclusive projects with the follo

Question

Camino Technologies is evaluating two mutually exclusive projects with the following net cash flows: Label each project's NPV profile on the graph below. Point A on the graph corresponds to a cost of capital of while Point B corresponds to a cost of capital of Camino's WACC is 10.2% and both projects have the same risk as the firms average project. Calculate each project's NPV. NPVx = NPVy = In choosing the better project, do the NPV and IRR methods lead to conflicting decisions? Yes No Camino Technologies' primary objective is to maximize shareholder value. Camino wants to accept the projects that add the most value for shareholders. Which project should Camino accept? Project y Project x

Explanation / Answer

Statement showing calculation of NPV Project X Project Y Particulars Time PVF@10.2% Amount PV(Amount *PVF) Amount PV(Amount *PVF) Cash Outflows                               -                      1.0000                             (1,000.000)                               (1,000.00)                             (1,000.000)                               (1,000.00) PV of Cash Outflows                               (1,000.00)                               (1,000.00) Cash Inflows(Savings in operating expenses)                        1.000                    0.9074                                   150.000                                     136.12                               1,000.000                                     907.44 Cash Inflows(Savings in operating expenses)                        2.000                    0.8234                                   300.000                                     247.03                                   100.000                                        82.34 Cash Inflows(Savings in operating expenses)                        3.000                    0.7472                                   350.000                                     261.53                                   150.000                                     112.08 Cash Inflows(Savings in operating expenses)                        4.000                    0.6781                                   750.000                                     508.55                                     50.000                                        33.90 PV of Cash Inflows                             1,153.2334                             1,135.7741 NPV                                 153.2334                                 135.7741 Yes , It may happen that IRR of one project is better while NPV of other project is higher. So there may be conflict In these methods It should chose Project X as it has higher NPV

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