Projects A and B are mutually exclusive projects. They have the following cash f
ID: 2718479 • Letter: P
Question
Projects A and B are mutually exclusive projects. They have the following cash flows: Use increments of 2% in finding the profile (ie., 0%,2%,4%,etc.) out to 28%. From your profile, approximately what is the ERR of project A and the IRR of project B? If the required rate of return (r) is 7%, which project should you choose? Do a NPV profile for this capital budgeting project. Use 12% increments out to 156%when finding the NPV profile Redo the NPV profile using 6 % increments to find the IRR, what can you say about the approximate IRR?Explanation / Answer
a)
Year
0
1
2
3
4
5
NPV
Profile0(rateof return=0%)
Project A
-16000
9500
4000
5200
1200
900
4800
Project B
-16000
4500
3000
3500
5000
7000
7000
Profile1(rateof return=2%)
Project A
-16000.0
9313.7
3844.7
4900.1
1108.6
815.2
3982.2
Project B
-16000.0
4411.8
2883.5
3298.1
4619.2
6340.1
5552.7
Profile2(rateof return=4%)
Project A
-16000.0
9134.6
3698.2
4622.8
1025.8
739.7
3221.1
Project B
-16000.0
4326.9
2773.7
3111.5
4274.0
5753.5
4239.6
Profile3(rateof return=6%)
Project A
-16000.0
8962.3
3560.0
4366.0
950.5
672.5
2511.3
Project B
-16000.0
4245.3
2670.0
2938.7
3960.5
5230.8
3045.2
Profile4(rateof return=8%)
Project A
-16000.0
8796.3
3429.4
4127.9
882.0
612.5
1848.1
Project B
-16000.0
4166.7
2572.0
2778.4
3675.1
4764.1
1956.3
Profile5(rateof return=10%)
Project A
-16000.0
8636.4
3305.8
3906.8
819.6
558.8
1227.4
Project B
-16000.0
4090.9
2479.3
2629.6
3415.1
4346.4
961.4
Profile6(rateof return=12%)
Project A
-16000.0
8482.1
3188.8
3701.3
762.6
510.7
645.5
Project B
-16000.0
4017.9
2391.6
2491.2
3177.6
3972.0
50.2
Profile7(rateof return=14%)
Project A
-16000.0
8333.3
3077.9
3509.9
710.5
467.4
99.0
Project B
-16000.0
3947.4
2308.4
2362.4
2960.4
3635.6
-785.8
Profile8(rateof return=16%)
Project A
-16000.0
8189.7
2972.7
3331.4
662.7
428.5
-415.0
Project B
-16000.0
3879.3
2229.5
2242.3
2761.5
3332.8
-1554.7
Profile9(rateof return=18%)
Project A
-16000.0
8050.8
2872.7
3164.9
618.9
393.4
-899.2
Project B
-16000.0
3813.6
2154.6
2130.2
2578.9
3059.8
-2263.0
Profile10(rateof return=20%)
Project A
-16000.0
7916.7
2777.8
3009.3
578.7
361.7
-1355.9
Project B
-16000.0
3750.0
2083.3
2025.5
2411.3
2813.1
-2916.8
Profile11(rateof return=22%)
Project A
-16000.0
7786.9
2687.4
2863.7
541.7
333.0
-1787.3
Project B
-16000.0
3688.5
2015.6
1927.5
2257.0
2590.0
-3521.4
Profile12(rateof return=24%)
Project A
-16000.0
7661.3
2601.5
2727.3
507.6
307.0
-2195.4
Project B
-16000.0
3629.0
1951.1
1835.7
2114.9
2387.8
-4081.5
Profile13(rateof return=26%)
Project A
-16000.0
7539.7
2519.5
2599.5
476.1
283.4
-2581.8
Project B
-16000.0
3571.4
1889.6
1749.7
1983.8
2204.2
-4601.3
Profile14(rateof return=28%)
Project A
-16000.0
7421.9
2441.4
2479.6
447.0
261.9
-2948.2
Project B
-16000.0
3515.6
1831.1
1668.9
1862.6
2037.3
-5084.5
b)
IRR= rate at which NPV=0
From the profile
For Project A, NPV is closer to zero (99) at 14% (Profile 7)
For Project B, NPV is closer to zero (50) at 12% (Profile 6)
Thus
Approximate IRR for Project A=14%
Approximate IRR for Project B=12%
c)
For required rate of return=7%
Year
0
1
2
3
4
5
NPV
Cash flow
Project A
-16000
9500
4000
5200
1200
900
4800
Project B
-16000
4500
3000
3500
5000
7000
7000
Present Value
Required rate=7%
Project A
-16000.0
8878.5
3493.8
4244.7
915.5
641.7
2174.2
Project B
-16000.0
4205.6
2620.3
2857.0
3814.5
4990.9
2488.3
NPV of Project B is higher than the NPV of project A at 7%, thus I would choose project B
2)
IRR= rate at which NPV=0
From the profile
NPV is closer to zero (-8.8) at 144%
Thus Approximate IRR=144%
Year
0
1
2
3
4
5
NPV
Profile0(rateof return=0%)
Project A
-16000
9500
4000
5200
1200
900
4800
Project B
-16000
4500
3000
3500
5000
7000
7000
Profile1(rateof return=2%)
Project A
-16000.0
9313.7
3844.7
4900.1
1108.6
815.2
3982.2
Project B
-16000.0
4411.8
2883.5
3298.1
4619.2
6340.1
5552.7
Profile2(rateof return=4%)
Project A
-16000.0
9134.6
3698.2
4622.8
1025.8
739.7
3221.1
Project B
-16000.0
4326.9
2773.7
3111.5
4274.0
5753.5
4239.6
Profile3(rateof return=6%)
Project A
-16000.0
8962.3
3560.0
4366.0
950.5
672.5
2511.3
Project B
-16000.0
4245.3
2670.0
2938.7
3960.5
5230.8
3045.2
Profile4(rateof return=8%)
Project A
-16000.0
8796.3
3429.4
4127.9
882.0
612.5
1848.1
Project B
-16000.0
4166.7
2572.0
2778.4
3675.1
4764.1
1956.3
Profile5(rateof return=10%)
Project A
-16000.0
8636.4
3305.8
3906.8
819.6
558.8
1227.4
Project B
-16000.0
4090.9
2479.3
2629.6
3415.1
4346.4
961.4
Profile6(rateof return=12%)
Project A
-16000.0
8482.1
3188.8
3701.3
762.6
510.7
645.5
Project B
-16000.0
4017.9
2391.6
2491.2
3177.6
3972.0
50.2
Profile7(rateof return=14%)
Project A
-16000.0
8333.3
3077.9
3509.9
710.5
467.4
99.0
Project B
-16000.0
3947.4
2308.4
2362.4
2960.4
3635.6
-785.8
Profile8(rateof return=16%)
Project A
-16000.0
8189.7
2972.7
3331.4
662.7
428.5
-415.0
Project B
-16000.0
3879.3
2229.5
2242.3
2761.5
3332.8
-1554.7
Profile9(rateof return=18%)
Project A
-16000.0
8050.8
2872.7
3164.9
618.9
393.4
-899.2
Project B
-16000.0
3813.6
2154.6
2130.2
2578.9
3059.8
-2263.0
Profile10(rateof return=20%)
Project A
-16000.0
7916.7
2777.8
3009.3
578.7
361.7
-1355.9
Project B
-16000.0
3750.0
2083.3
2025.5
2411.3
2813.1
-2916.8
Profile11(rateof return=22%)
Project A
-16000.0
7786.9
2687.4
2863.7
541.7
333.0
-1787.3
Project B
-16000.0
3688.5
2015.6
1927.5
2257.0
2590.0
-3521.4
Profile12(rateof return=24%)
Project A
-16000.0
7661.3
2601.5
2727.3
507.6
307.0
-2195.4
Project B
-16000.0
3629.0
1951.1
1835.7
2114.9
2387.8
-4081.5
Profile13(rateof return=26%)
Project A
-16000.0
7539.7
2519.5
2599.5
476.1
283.4
-2581.8
Project B
-16000.0
3571.4
1889.6
1749.7
1983.8
2204.2
-4601.3
Profile14(rateof return=28%)
Project A
-16000.0
7421.9
2441.4
2479.6
447.0
261.9
-2948.2
Project B
-16000.0
3515.6
1831.1
1668.9
1862.6
2037.3
-5084.5
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