The cash flows of another project with a missing initial cost are as follows: $4

Question

The cash flows of another project with a missing initial cost are as follows: $400 $800 $500 $300 The project has the same risk as the firm's average project. While you don't know the project's initial cost, you have been told the project has n IRR of 13.3703%. Your boss wants to accept the project because the project's IRR exceeds the WACC of 12.6%, but another manager h s mentioned that the NPV should be considered. How much value does this project create for the firm? O s66.50 O $35.28 O $60.18 O $23.07 O $17.03

Explanation / Answer

Statement showing calculation of NPV Particulars Time PVF@13.3703% Amount PV(Amount *PVF) Cash Inflows                        1.000                                      0.8821                                   400.000                                     352.83 Cash Inflows                        2.000                                      0.7780                                   800.000                                     622.43 Cash Inflows                        3.000                                      0.6863                                   500.000                                     343.14 Cash Inflows                        4.000                                      0.6053                                   300.000                                     181.60 PV of Cash Inflows                             1,500.0014 AT IRR, PV of Cash outflows is equal to PV of cash Inflows Thus Cash Outflows are 1500(Assuming all cash flows are at period 0 Statement showing calculation of NPV Particulars Time PVF@12.6% Amount PV(Amount *PVF) Cash Outflows                               -                                        1.0000                             (1,500.000)                               (1,500.00) PV of Cash Outflows                               (1,500.00) Cash Inflows                        1.000                                      0.8881                                   400.000                                     355.24 Cash Inflows                        2.000                                      0.7887                                   800.000                                     630.98 Cash Inflows                        3.000                                      0.7005                                   500.000                                     350.23 Cash Inflows                        4.000                                      0.6221                                   300.000                                     186.62 PV of Cash Inflows                             1,523.0716 NPV                                   23.0716 Project is adding $23.07 to firm Time Amount Cumulative cash flows                                                                                          1.00                   500.000                                 500.0000                                                                                          2.00                   800.000                             1,300.0000                                                                                          3.00                   800.000                             2,100.0000                                                                                          4.00                   800.000                             2,900.0000                                                                                          5.00                   600.000                             3,500.0000 Payback period is 3.5 Years which means 2100 + 800/2 = 2500 Thus cash outflows are 2500 since in payback period company is able to recover its cash outflows Statement showing calculation of NPV Particulars Time PVF@10.1% Amount PV(Amount *PVF) Cash Outflows                               -                                        1.0000                             (2,500.000)                               (2,500.00) PV of Cash Outflows                               (2,500.00) Cash Inflows                        1.000                                      0.9083                                   500.000                                     454.13 Cash Inflows                        2.000                                      0.8249                                   800.000                                     659.96 Cash Inflows                        3.000                                      0.7493                                   800.000                                     599.42 Cash Inflows                        4.000                                      0.6805                                   800.000                                     544.43 Cash Inflows                        4.000                                      0.6181                                   600.000                                     370.86 PV of Cash Inflows                             2,628.7971 NPV                                 128.7971 NPV is $128.80

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