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1. Calculate the NPV for the following projects if the annual discount rate is 7

ID: 2705736 • Letter: 1

Question

1.     Calculate the NPV for the following projects if the annual discount rate is 7%:

     Year

A

B

C

0

-10000

-13000

-15000

1

5000

5000

7000

2

6000

2000

2000

3

7000

6000

1000

4

2000

1000

5000

5

1000

7000

6000

2.      Which projects will the firm accept if the payback period is three years? Which projects will the firm accept if the discounted payback period is three years? (Show math)

3.      What is the IRR for each of the three projects?

4.      What is the MIRR for each of the three projects?

  

     Year

     

A

     

B

     

C

     

0

     

-10000

     

-13000

     

-15000

     

1

     

5000

     

5000

     

7000

     

2

     

6000

     

2000

     

2000

     

3

     

7000

     

6000

     

1000

     

4

     

2000

     

1000

     

5000

     

5

     

1000

     

7000

     

6000

  

Explanation / Answer

1)

NPV

for project A it is -10000+5000/1.07 +6000/(1.07^2) + 7000/(1.07^3) + 2000/(1.07^4) + 1000/(1.07^5) =7866

for project B -13000+5000/1.07 +2000/(1.07^2) + 6000/(1.07^3) + 1000/(1.07^4) + 7000/(1.07^5)= 4071

for project C -15000+7000/1.07 +2000/(1.07^2) + 1000/(1.07^3) + 5000/(1.07^4) + 6000/(1.07^5) =2198

2)if the payback period is 3 yrs

for project A value obtained = -10000+5000+6000+7000=8000

for project B it is =-13000+5000+2000+6000=0

for project C it is = -18k+7k+2k+1k=-8k

firm will accept project A

if discounted payback period is three years

for project A value obtained = -10000+5000/1.07 +6000/(1.07^2) + 7000/(1.07^3)=5267

for project B it is =-13000+5000/1.07 +2000/(1.07^2) + 6000/(1.07^3)=-1682

for project C it is = -15000+7000/1.07 +2000/(1.07^2) + 1000/(1.07^3)=-5894

3)IRR for project A=39.25%

for B = 16.67%

for C = 12.38%

4)to calculate MIRR let the positive cash flows are reinvested at 10%

then MIRR forA =1.08%

for B =1.04%

for C=1.02%