Assume Trivoli Company has the following cash flows from 2 projects it is curren
ID: 2724633 • Letter: A
Question
Assume Trivoli Company has the following cash flows from 2 projects it is currently evaluating. Use the Trivoli WACC (rounded to 2 decimal places) you calculated above to evaluate these independent projects. • Which projects would you pick under NPV, IRR, MIRR, Payback, and Discounted Payback if we assume Trivoli managers want to recoup their investment in 3 years? • For every project accepted or rejected under each method, give a reason. • Calculate the cross over rate.
0 4 5 1 $100 $300 $400 $700 $325 Project A -1,250 Project B -$1,550 $800 725 $325 $325 325Explanation / Answer
Answer
Internal rate of Return
Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
We have to find IRR by trial and error method by assuming different discount rates
Project A
Suppose discount rate is 11.795%
Figures in $
Year
Cash flow
Disc Rate : 11.795%
Present value
0
-1250
1
-1250.00
1
100
0.894494
89.45
2
300
0.80012
240.04
3
400
0.715703
286.28
4
700
0.640192
448.13
5
325
0.572648
186.11
NPV
0.0
IRR
11.795%
Project B
Suppose discount rate is 23.44%
Figures in $
Year
Cash flow
Disc Rate : 23.44%
Present value
0
-1550
1
-1550
1
800
0.81011
648.09
2
725
0.656278
475.80
3
325
0.531658
172.79
4
325
0.430701
139.98
5
325
0.348916
113.40
NPV
0
IRR
23.44%
Answer : IRR of Project B is higher than IRR of Project A. So Project B should be selected.
Figures in $
Year
Cash flow
Disc Rate : 11.795%
Present value
0
-1250
1
-1250.00
1
100
0.894494
89.45
2
300
0.80012
240.04
3
400
0.715703
286.28
4
700
0.640192
448.13
5
325
0.572648
186.11
NPV
0.0
IRR
11.795%
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