Zayas, LLC, has identified the following two mutually exclusive projects: What i
ID: 2743089 • Letter: Z
Question
Zayas, LLC, has identified the following two mutually exclusive projects: What is the IRR for each of these projects? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) If you apply the IRR decision rule, which project should the company accept? Assume the required return is 12 percent what is the NPV for each of these projects? (Do not round intermediate calculations and round your answer as a percent rounded to 2 decimal places, e.g., 32.16.) What project will you choose if you apply the NPV decision rule? Over what range of discount rates would you choose project A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Over what range of discount rates would you choose project B? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) At what discount rate would you be indifferent between these two projects? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)Explanation / Answer
Year
CashFlow(A)
CashFlow(B)
Cross Over rate
0
(56,000)
(56,000)
-
1
32,000
19,400
12,600
2
26,000
23,400
2,600
3
19,000
28,000
(9,000)
4
13,200
25,400
(12,200)
IRR
26.60%
24.27%
14.89%
Alternatively
Let us try with trial and error method:
Let us try with 26%
Year
CashFlow(A)
PV Factor@ 26%
PV
0
(56,000)
1
(56,000.00)
1
32,000
0.7937
25,396.83
2
26,000
0.6299
16,376.92
3
19,000
0.4999
9,498.21
4
13,200
0.3968
5,237.11
NPV
509.07
As NPV positive let us try with 27%
Year
CashFlow(A)
PV Factor@ 27%
PV
0
(56,000)
1
(56,000.00)
1
32,000
0.7874
25,196.85
2
26,000
0.6200
16,120.03
3
19,000
0.4882
9,275.61
4
13,200
0.3844
5,074.10
NPV
(333.41)
IRR= R1+ (NPV1 x(R2-R1)%/(NPV1-(NPV2)
=26% +(509.07 x (27-26)%/(509.07-(-333.41)
=26%+5.0907 /842.48
=26% +0.60
=26.60%
Cashflow (B)
Year
CashFlow(B)
PV Factor@ 24%
PV
0
(56,000)
1
(56,000.00)
1
19,400
0.8065
15,645.16
2
23,400
0.6504
15,218.52
3
28,000
0.5245
14,685.64
4
25,400
0.4230
10,743.53
NPV
292.86
As NPV is positive let us try with 25%
Year
CashFlow(B)
PV Factor@ 25%
PV
0
(56,000)
1
(56,000.00)
1
19,400
0.8000
15,520.00
2
23,400
0.6400
14,976.00
3
28,000
0.5120
14,336.00
4
25,400
0.4096
10,403.84
NPV
(764.16)
IRR= R1+ (NPV1 x(R2-R1)%/(NPV1-(NPV2)
=24% +(292.86 x (25-24)%/( 292.86-(-764.16)
=24%+2.9286 /1,057.02
=24% +0.277
=24.27%
As IRR of A is Higher Project A is preferable.
Year
CashFlow(A)
PV Factor@ 12%
PV
0
(56,000)
1
(56,000.00)
1
32,000
0.8929
28,571.43
2
26,000
0.7972
20,727.04
3
19,000
0.7118
13,523.82
4
13,200
0.6355
8,388.84
NPV
15,211.13
Year
CashFlow(B)
PV Factor@ 12%
PV
0
(56,000)
1
(56,000.00)
1
19,400
0.8929
17,321.43
2
23,400
0.7972
18,654.34
3
28,000
0.7118
19,929.85
4
25,400
0.6355
16,142.16
NPV
16,047.77
As NPV of Project B is higher B is preferable.
Crossover point for IRR is IRR(CFA– CFB), and =14.89%
For discount rates less than 14.89%, NPVB> NPVA.
For discount rates greater than 14.89% NPVA> NPVB.
Year
CashFlow(A)
CashFlow(B)
Cross Over rate
0
(56,000)
(56,000)
-
1
32,000
19,400
12,600
2
26,000
23,400
2,600
3
19,000
28,000
(9,000)
4
13,200
25,400
(12,200)
IRR
26.60%
24.27%
14.89%
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