Tysseland Company is considering two mutually exclusive investments. The project

Question

Tysseland Company is considering two mutually exclusive investments. The projects’ expected after-tax cash flows are as follows:

EXPECTED NET CASH FLOWS

YEAR PROJECT X PROJECT Y

0 $-300 $-405

1 -387 134

2 -193 134

3 -100 134

4 500 134

5 500 134

6 850 134

7 100 0

a. What is each project’s NPV if the required rate of return is 12 percent? Which project should be selected according to this criterion? Why?

b. What is each project’s IRR? Which project should be selected according to this criterion? Why?

Explanation / Answer

Hi,

Please find the answers as follows:

Part A: NPV

Project X = -300 - 387/(1+.12) - 193/(1+.12)^2 - 100/(1+.12)^3 + 500/(1+.12)^4 + 500/(1+.12)^5 + 850/(1+.12)^6 + 100/(1+.12)^7 = 206.77

Project Y = -405 + 134/(1+.12)^1 + 134/(1+.12)^2 + 134/(1+.12)^3 + 134/(1+.12)^4 + 134/(1+.12)^5 + 134/(1+.12)^6 + 0 = 145.93

Project X should be selected as it offers a higher NPV.

Part B: IRR

Project X = 17.84%

Project Y = 23.97%

Project X should be selected as it offers a higher IRR.

Thanks.

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