Company K is considering two mutally exclusive projects. The cash flows of the p

Question

Company K is considering two mutally exclusive projects. The cash flows of the projects are as follows. Project A year 0 -2,000,000 year 1 500,000 year 2 500,000 year 3 500,000 year 4 500,000 year 5 500,000 year 6 500,000 year 7 500,00 project b year 0 -2,000,000 year 7 5,650,000 a. compute the NPV and IRR for the above two projec, assuming a 13% required rate of return b. discuss the ranking conflict c. what decision should be made reagrding these two projects?

Explanation / Answer

Project A year 0 -2,000,000 year 1 500,000 year 2 500,000 year 3 500,000 year 4 500,000 year 5 500,000 year 6 500,000 year 7 500,00 for project A , IRR = ?? 2000000 = 500,000/(1+r) + 500,000/(1+r)^2 + 500,000/(1+r)^3 + 500,000/(1+r)^4 + 500,000/(1+r)^5 + 500,000/(1+r)^6 + 500,000/(1+r)^7 solving this would give us IRR (i.e. r) r = 0.16326 = 16.326 % >13% (therefore project should be accepted) NPV = 500,000/(1.13) + 500,000/(1.13)^2 + 500,000/(1.13)^3 + 500,000/(1.13)^4 + 500,000/(1.13)^5 + 500,000/(1.13)^6 + 500,000/(1.13)^7 = 2,211,305.216 NPV = 2,211,305.216 > 2,000,000 (project should be accepted ) For project B: IRR =r 2,000,000= 5,650,000/(1+r)^7 r = 0.15993 = 15.993% > 13% hence the project should be accepted) NPV = 5650000/(1.13^7) = 2,401,592.637 > 2,000,000 (project should be accepted)

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