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NPV Your division is considering two investment projects, each of which requires

ID: 2771358 • Letter: N

Question

NPV

Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows:

What are the two projects' net present values, assuming the cost of capital is 5%? Round your answers to the nearest dollar.
Project A $
Project B $

What are the two projects' net present values, assuming the cost of capital is 10%? Round your answers to the nearest dollar.
Project A $
Project B $

What are the two projects' net present values, assuming the cost of capital is 15%? Round your answers to the nearest dollar.
Project A $
Project B $

What are the two projects' IRRs at these same costs of capital? Round your answers to two decimal places.
Project A     %
Project B     %

Year Project A Project B 1 $  6,000,000 $20,000,000 2 10,000,000 10,000,000 3 20,000,000 6,000,000

Explanation / Answer

A. Calculation of NPV when Cost of Capital is 5% Project A Year 0 Year 1 Year 2 Year3 Initial Investment         -1,50,00,000 Year wise Cashflow        60,00,000         1,00,00,000         2,00,00,000 Net Cash flow (i)         -1,50,00,000        60,00,000         1,00,00,000         2,00,00,000 Present Value factor at 5% (ii) 1                 0.952                     0.907                     0.864 Present Value (i * ii)         -1,50,00,000        57,14,286            90,70,295         1,72,76,752 NPV = adding all year cashflows          1,70,61,332 Project B Year 0 Year 1 Year 2 Year3 Initial Investment         -1,50,00,000 Year wise Cashflow     2,00,00,000         1,00,00,000            60,00,000 Net Cash flow (i)         -1,50,00,000     2,00,00,000         1,00,00,000            60,00,000 Present Value factor at 5% (ii) 1                 0.952                     0.907                     0.864 Present Value (i * ii)         -1,50,00,000     1,90,47,619            90,70,295            51,83,026 NPV = adding all year cashflows          1,83,00,939 B. Calculation of NPV when Cost of Capital is 10% Project A Year 0 Year 1 Year 2 Year3 Initial Investment         -1,50,00,000 Year wise Cashflow        60,00,000         1,00,00,000         2,00,00,000 Net Cash flow (i)         -1,50,00,000        60,00,000         1,00,00,000         2,00,00,000 Present Value factor at 10% (ii) 1                 0.909                     0.826                     0.751 Present Value (i * ii)         -1,50,00,000        54,54,545            82,64,463         1,50,26,296 NPV = adding all year cashflows          1,37,45,304 Project B Year 0 Year 1 Year 2 Year3 Initial Investment         -1,50,00,000 Year wise Cashflow     2,00,00,000         1,00,00,000            60,00,000 Net Cash flow (i)         -1,50,00,000     2,00,00,000         1,00,00,000            60,00,000 Present Value factor at 10% (ii) 1                 0.909                     0.826                     0.751 Present Value (i * ii)         -1,50,00,000     1,81,81,818            82,64,463            45,07,889 NPV = adding all year cashflows          1,59,54,170 C. Calculation of NPV when Cost of Capital is 15% Project A Year 0 Year 1 Year 2 Year3 Initial Investment         -1,50,00,000 Year wise Cashflow        60,00,000         1,00,00,000         2,00,00,000 Net Cash flow (i)         -1,50,00,000        60,00,000         1,00,00,000         2,00,00,000 Present Value factor at 15% (ii) 1                 0.870                     0.756                     0.658 Present Value (i * ii)         -1,50,00,000        52,17,391            75,61,437         1,31,50,325 NPV = adding all year cashflows          1,09,29,153 Project B Year 0 Year 1 Year 2 Year3 Initial Investment         -1,50,00,000 Year wise Cashflow     2,00,00,000         1,00,00,000            60,00,000 Net Cash flow (i)         -1,50,00,000     2,00,00,000         1,00,00,000            60,00,000 Present Value factor at 15% (ii) 1                 0.870                     0.756                     0.658 Present Value (i * ii)         -1,50,00,000     1,73,91,304            75,61,437            39,45,097 NPV = adding all year cashflows          1,38,97,838 D. IRR Calculation For Prject A 47% For Prject B 82% IRR= Ra + (NPVa/(NPVa-NPVb))*(Rb-Ra) where Ra is the discount rate that gives the positive net present value, NPVa is the positive NPV, NPVb is the negative NPV and Rb is the discount rate that gives the negative NPV.