lls esumated its cost of capital to be 12 percent. Assume that the entire $100,0
ID: 2781347 • Letter: L
Question
lls esumated its cost of capital to be 12 percent. Assume that the entire $100,000 is paid at time 0 (the beginning of the project). The marginal tax rate for the firm is 40 percent. Should the firm undertake the training program? Why or why not? ATE 7. Tw o mutually exclusive investment projects have the following forecasted cash flows: Year $-20,000 10,000 +10,000 +10,000 +10,000 S -20,000 +60,000 a. Compute the internal rate of return for each project. b. Compute the net present value for each project if the firm has a 10 percent cost of capital. c. Which project should be adopted? Why? 8. Show that the internal rate of return of the following investment is 0, 100, and 20 percent: Net investment Net cash flows $-1,000 +6,000 -11,000 Year 0 Year 1 Year 2Explanation / Answer
CALCULATION OF PRESNT VALUE OF THE PROJECT A Years Cash Flows PVF @ 10% Present Value 0 -$20,000 1 -$20,000.00 1 $10,000 0.9091 $9,090.91 2 $10,000 0.8264 $8,264.46 3 $10,000 0.7513 $7,513.15 4 $10,000 0.6830 $6,830.13 Net Present Value = $11,698.65 CALCULATION OF PRESNT VALUE OF THE PROJECT B Years Cash Flows PVF @ 10% Present Value 0 -$20,000 1 -$20,000.00 1 $0 0.9091 $0.00 2 $0 0.8264 $0.00 3 $0 0.7513 $0.00 4 $60,000 0.6830 $40,980.81 Net Present Value = $20,980.81 IRR : IRR Means with a particular Percentage rate , At that point the present value become the zero CALCULATION OF THE IRR OF THE PROJECT A First we calculate randomly present value @ 34% discounting rate Years Cash Flows PVF @ 34% Present Value 0 -$20,000 1 -$20,000.00 1 $10,000 0.7463 $7,462.69 2 $10,000 0.5569 $5,569.17 3 $10,000 0.4156 $4,156.10 4 $10,000 0.3102 $3,101.56 Net Present Value = $289.52 With PVF of 34% we are getting positive = 289.52 First we calculate randomly present value @ 35% discounting rate Years Cash Flows PVF @ 35% Present Value 0 -$20,000 1 -$20,000.00 1 $10,000 0.7407 $7,407.41 2 $10,000 0.5487 $5,486.97 3 $10,000 0.4064 $4,064.42 4 $10,000 0.3011 $3,010.68 Net Present Value = -$30.52 With PVF of 35% we are getting negative = -30.52 In the given case the pv with 34% is coming to postive means the present value is more then 34% but with 35 Present value cash flow become negative so the present value is between 34% and 35% So the differecne in both the net present value is = $289.52 - -$30.52 Total is become = $320.04 So , the difference % = $289.52 "/"By $320.04 So , the difference % = 0.90 So, the IRR = 34.90% Answer = IRR = 34.94% CALCULATION OF THE IRR OF THE PROJECT B First we calculate randomly present value @ 31% discounting rate Years Cash Flows PVF @ 31% Present Value 0 -$20,000 1 -$20,000.00 1 $0 0.7634 $0.00 2 $0 0.5827 $0.00 3 $0 0.4448 $0.00 4 $60,000 0.3396 $20,373.52 Net Present Value = $373.52 With PVF of 31% we are getting positive = 373.52 Second we calculate randomly present value @ 32% discounting rate for negative PV Years Cash Flows PVF @ 32% Present Value 0 -$20,000 1 -$20,000.00 1 0.7576 $0.00 2 0.5739 $0.00 3 0.4348 $0.00 4 $60,000 0.3294 $19,763.12 Net Present Value = -$236.88 With PVF of 32% we are getting negative = -236.88 In the given case the pv with 31% is coming to postive means the present value is more then 31% but with 32 Present value cash flow become negative so the present value is between 31% and 32% So the differecne in both the net present value is = $373.52 - -$236.88 Total is become = $610.40 So , the difference % = $373.52 "/"By $610.40 So , the difference % = 0.61 So, the IRR = 32.61% Answer = IRR = 32.61% NPV IRR Proejct A $11,698.65 34.90% Proejct B $20,980.81 32.61% On the Basis of the IRR Project A have the greater IRR so we can select the Project A Answer = C= Project A
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.