1.a -Using a required rate of return of 7%, calculate the Net Present Value & In
ID: 2780904 • Letter: 1
Question
1.a -Using a required rate of return of 7%, calculate the Net Present Value & Internal Rate of Return for the following:
Project A
Project B
Year 0
-800
-900
Year 1
300
300
Year 2
300
300
Year 3
300
500
NPV=
IRR=
1.b -Based on your answers which project would you choose?
1.c -Are your findings of NPV & IRR consistent?
2.a-Calculate the Internal Rate of Return for the below project.
Year 0
-1,000
100
400
500
800
-400
IRR=
2.b-If the opportunity cost of capital is 10%, should this project be accepted? Why or Why not?
3. Consider projects A & B, below; respective NPVs are noted.
Project
C0
C1
C2
NPV @ 10%
A
-30,000
21,000
21,000
6,446
B
-50,000
33,000
33,000
7,273
3.a- Calculate the Internal Rate of Return for each project.
IRR(Project A)=
IRR(Project B)=
3.b-Which project does the IRR rule suggest?
3.c-Are your IRR findings consistent with the NPV values?
4. An automated check out system costs $2.5 million to purchase and install. It is anticipated that annual cash flows will increase by $600,000 each year for the next 6 years. Your firm will only accept a project that has a payback period of less than 5 years. Calculate the payback period for this project and indicate whether or not it would be accepted.
0
1
2
3
4
5
6
CF
-2,500
600
600
600
600
600
600
Project A
Project B
Year 0
-800
-900
Year 1
300
300
Year 2
300
300
Year 3
300
500
NPV=
IRR=
Explanation / Answer
As per Chegg's policy, I can answer only four questions 1a,1b,1c, and 2a but just for completness I will be answering 2b as well.
1.
Required rate of return 7%
Project A, NPV = -CF0 + CF1/(1+R) + CF2/(1+R)^2 + CF3/(1+R)^3
NPV of Project A = -800 + 300 / (1+0.07) + 300 / (1+0.07)^2 + 300 / (1+0.07)^3 = -800 + 300/1.07 + 300/1.07^2 + 300/1.07^3 = -800 + 280.37 + 262.03 + 244.89 = -800 + 787.29 = -12.71
Project B, NPV = -CF0 + CF1/(1+R) + CF2/(1+R)^2 + CF3/(1+R)^3
NPV of Project B = -900 + 300 / (1+0.07) + 300 / (1+0.07)^2 + 500 / (1+0.07)^3 = -900 + 300/1.07 + 300/1.07^2 + 500/1.07^3 = -900 + 280.37 + 262.03 + 408.15 = -900 + 950.55 = 50.55
IRR is the rate at which NPV becomes 0, I will be calculating IRR using excel and will explain the formila for IRR.
IRR of Project A, 6.13% (In excel, enter all the cash flows just remember cf0 is in negative and enter this in negative form only, then type irr function and select the cash flows, you will get your irr)
IRR of Project B, 9.79%
b. Based on my findings I will chose project B because its NPV is positive and IRR/Rate of Return is greater than 1.
c. In project B it is consistent, also in project A irr rule suggests that project should be rejected and NPV rule suggests the same.
2.
a. Again IRR can be calculated using EXCEL as explained by me in the previous question.
IRR of the project, 13.95%
b. As per IRR rule, IRR / Cost of capital should be greater than 1 in order to accept the project, Here the ratio is greater than 1 so the project should be accepted.
Just to be double sure I will check the project by NPV rule also. NPV of the project (Here i will use excel for NPV as I have already explaied you NPV calculation in the previous question)
NPV of the project = 86.53 which is greater than 0 so the project should be accepted.
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