Higher Ground Company is presented with the following two mutually exclusive pro

Question

Higher Ground Company is presented with the following two mutually exclusive projects. The required return for both projects is 15 percent.

What is the IRR for each project? (Do not include the percent signs (%). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

What is the NPV for each project? (Do not include the dollar signs ($). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

Higher Ground Company is presented with the following two mutually exclusive projects. The required return for both projects is 15 percent.

Explanation / Answer

computation of Net present value of project M

year project M discount@15% PV cash inflows discount@17% Pv cash inflows

1 64400 0.8696 56002 0.8547 55042

2 82400 0.7561 62302 0.7305 60193

3 73400 0.6575 48260 0.6244 45830

4 59400 0.5718 33964 0.5337 31701

present vcalue of cash inflows 200528 192766

less: initial investment (141000)   (141000)

net present value 59528 51766

IRR = lower rate + ( net present value of lower rate) * difference in factor

NPV lower rate - NPV higher rate

= 30%

computation of Net present value of project N

year project N discount@15% PV cash inflows discount@17% Pv cash inflows

1 148000 0.8696 128700 0.8547 126495

2 189000 0.7561 142902 0.7305 138064

3 133000 0.6575 87447 0.6244 83045

4 119900 0.5718 68558 0.5337 63990

present vcalue of cash inflows 427607 411594

less: initial investment 364000 (364000)

net present value 63607 47594

IRR = lower rate + ( net present value of lower rate) * difference in factor

NPV lower rate - NPV higher rate

= 22%

a. IRR

project M = 30%

Project N= 22%

b. NPV

project M =$59528

project N =$63607

c. project M is accepted.

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