orldwide Widget Manufacturing, Inc., wants to add two new production lines of wi
ID: 2779851 • Letter: O
Question
orldwide Widget Manufacturing, Inc., wants to add two new production lines of widgets. You’re asked to analyze whether to go forward with two mutually exclu¬sive projects. The cash flows of both projects are displayed below. Your company uses a cost of capital of 9 percent to evaluate projects such as the two you’re now analyzing. Show all calculations. Year: 0 1 2 3 4 5 Project A Cash Flow –$1,000 $150 $300 $500 $300 $250 Project B Cash Flow –$1,400 $300 $470 $200 $600 $350 Calculate the payback of Project A: Calculate the payback of Project B: Calculate the IRR of Project A: Calculate the IRR of Project B: Using the NPV method and assuming a cost of capital of 6 percent, calculate the NPV of these two projects. Which of these mutually exclusive projects should the company accept? can someone just please show me how to do the problems
Explanation / Answer
A: Payback period = 3 + 50/300 = 3.17 Years
B: Payback period = 3 + 430/600 = 3.72 Years
IRR is the rate at which NPV of the project is zero.
Payback period is the period by which project recovers the investment on undiscounted basis.
Crossover rate = 1.62%; it is the rate at which both projects have same NPV.
One of sole reason for selecting the project is the NPV rule.
At both 6% and 9%, A is selected as A is better than B.
Furthermore, for cost of capital less than 1.62%, B is better and for cost of capital more than 1.62%, project A is better but they are before IRR.
Year 0 1 2 3 4 5 IRR NPV @ 6% NPV @ 9% NPV @ 1% Payback period A -1000 150 300 500 300 250 14.28% 252.76 151.22 454.06 3.17 B -1400 300 470 200 600 350 11.02% 206.04 77.79 461.49 3.72 A - B 400 -150 -170 300 -300 -100 1.62%Related Questions
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