Show work: 2) Consider two mutually exclusive projects X and Y with identical in

Question

Show work: 2) Consider two mutually exclusive projects X and Y with identical initial outlays of $600,000 and useful lives of 5 years. Project X is expected to produce an after-tax cash flow of $180,000 each year. Project Y is expected to generate a single after-tax cash flow of $1,015,000 in year 5. The discount rate is 14%. A) calculate net present value of each project B) calculatethe IRR for each project. C) accept or reject each project. Show work: 2) Consider two mutually exclusive projects X and Y with identical initial outlays of $600,000 and useful lives of 5 years. Project X is expected to produce an after-tax cash flow of $180,000 each year. Project Y is expected to generate a single after-tax cash flow of $1,015,000 in year 5. The discount rate is 14%. A) calculate net present value of each project B) calculatethe IRR for each project. C) accept or reject each project. 2) Consider two mutually exclusive projects X and Y with identical initial outlays of $600,000 and useful lives of 5 years. Project X is expected to produce an after-tax cash flow of $180,000 each year. Project Y is expected to generate a single after-tax cash flow of $1,015,000 in year 5. The discount rate is 14%. A) calculate net present value of each project B) calculatethe IRR for each project. C) accept or reject each project.

Explanation / Answer

(A) NPV is sum of all discounted cash inflows & outflows.

(B) IRR is that discount rate which makes NPV equal to zero. It is found out by using Excel IRR function.

(C)

Project X has both higher IRR and higher positive NPV compared to project Y, so X is accepted.

Project Y has negative NPV, so it is rejected.

Project X Year Cash Flow ($) Discount rate @14% Discounted cash flow ($) (A) (B) (A) x (B) 0 -6,00,000 1.0000 -6,00,000 1 1,80,000 0.8772 1,57,895 2 1,80,000 0.7695 1,38,504 3 1,80,000 0.6750 1,21,495 4 1,80,000 0.5921 1,06,574 5 1,80,000 0.5194 93,486 NPV ($) = 17,955 Project Y Year Cash Flow ($) Discount rate @14% Discounted cash flow ($) (A) (B) (A) x (B) 0 -6,00,000 1.0000 -6,00,000 1 0 0.8772 0 2 0 0.7695 0 3 0 0.6750 0 4 0 0.5921 0 5 10,15,000 0.5194 5,27,159 NPV ($) = -72,841

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