Scanlon Inc. is considering Projects S and L, whose cash flows are shown below.
ID: 2716723 • Letter: S
Question
Scanlon Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used. WACC=10.00%
1) Calculate the Pay Back Periods of the Projec t A and B (i.e., PIA and PIB)
2) Calculate the Net Present Value, NPVA and NPVB
3) Calculate the Internal Rate of Return, IRRA and IRRB.
4) Calculate the Profitability Index, PIA and PIA
5) Find Crossover Rate (Fisher’s rate of intersection), if it exists. Roughly, draw NPV files of the projects. Indicate the crossover rate, intercept (Y-axis) and IRRs for each project on your drawing.
Please show formulas for all, for #5, show a few of the formulas, I can figure out the rest. Thanks!
End of Year Project Investment 1 2 3 4 A ($2,050) $750 $760 $770 $780 B ($4,300) $1,500 $1,518 $1,536 $1,554Explanation / Answer
Answer-1 Year Cashflow Of project A Cashflow Of project B Cumulative cash flow of A Cumulative cash flow of B 0 ($2,050) ($4,300) 1 $750 $1,500 $750 $1,500 2 $760 $1,518 $1,510 $3,018 3 $770 $1,536 $2,280 $4,554 4 $780 $1,554 $3,060 $6,108 WACC = 10% For project-A Cash to be recovered = $2,050 Cash of $1510 is recovered in 2 years Remaining amount to be recovered = $2050 -$1510 = $540 Now, $2280 is recovered in = 12 months $540 will be recovered in = 2.842105263 months So payback period = 2 years and 2.842 months For project-A Cash to be recovered = $4,300 Cash of $3018 is recovered in 2 years Remaining amount to be recovered = $4300 -$3018 = $1,282 Now, $4554 is recovered in = 12 months $1282 will be recovered in = 3.378129117 months So payback period = 2 years and 3.378 months Answer-2 Year Cashflow Of project A Cashflow Of project B 0 ($2,050) ($4,300) 1 $750 $1,500 2 $760 $1,518 3 $770 $1,536 4 $780 $1,554 NPV of project A at 10% = $371.18 NPV of project B at 10% = $533.60 Answer-3 IRR of Project-A = 18.06% IRR of Project-B = 15.58% Answer-4 Profitability Index of project A = 1.18 Profitability Index of project B = 1.12 Answer-5 Year Cashflow Of project A Cashflow Of project B Incremental cash flows 0 ($2,050) ($4,300) $2,250 1 $750 $1,500 ($750) 2 $760 $1,518 ($758) 3 $770 $1,536 ($766) 4 $780 $1,554 ($774) Cross over rate = IRR of incremental cash flows = 13.27%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.