(Related to Checkpoint 11.1, Checkpoint 11.3, and Checkpoint 11.4) (Net present
ID: 2786633 • Letter: #
Question
(Related to Checkpoint 11.1, Checkpoint 11.3, and Checkpoint 11.4) (Net present value, profitability index, and internal rate of return calculations) You are considering two independent projects, Project A and Project B. The initial cash outlay associated with Project A is $53,000 and the initial cash cutlay associated with Project B is $72,000. The discount rate on both projects is 10.9 percent. The expected annual cash flows from each project are as follows: Year Project A Project B $(53,000) 9,000 9,000 9,000 9,000 9,000 9,000 $(72.000) 10,000 10,000 10,000 10.000 10,000 10,000 Calculate the NPV, Pl, and IRR for each project and indicate if the project should be accepted or not. a. The NPV of Project A is S. (Round to the nearest cent.)Explanation / Answer
NPV is calculated by discounting the cashflows
PV = C/(1+r)^n
C - Cashflow
r - Discount rate
n - years to the cashflow
Project A:
NPV = -53000 + 9000/(1+0.109)^1 + 9000/(1+0.109)^2 + 9000/(1+0.109)^3 + 9000/(1+0.109)^4 + 9000/(1+0.109)^5 + 9000/(1+0.109)^6 = -14815.22
NPV = -$14815.22
PI = NPV + Initial investment / Initial investment
PI = (-14815.22+53000)/53000 = 0.72
IRR is the rate at which NPV = 0
NPV = -53000 + 9000/(1+IRR)^1 + 9000/(1+IRR)^2 + 9000/(1+IRR)^3 + 9000/(1+IRR)^4 + 9000/(1+IRR)^5 + 9000/(1+IRR)^6 = 0
By trail and error, IRR = 0.54%
Project B:
NPV = -72000 + 10000/(1+0.109)^1 + 10000/(1+0.109)^2 + 10000/(1+0.109)^3 + 10000/(1+0.109)^4 + 10000/(1+0.109)^5 + 10000/(1+0.109)^6 = -29572.47
NPV = -$29572.47
PI = NPV + Initial investment / Initial investment
PI = (-29572.47+72000)/72000 = 0.59
IRR is the rate at which NPV = 0
NPV = -53000 + 9000/(1+IRR)^1 + 9000/(1+IRR)^2 + 9000/(1+IRR)^3 + 9000/(1+IRR)^4 + 9000/(1+IRR)^5 + 9000/(1+IRR)^6 = 0
By trail and error, IRR = -4.97%
For both the projects, NPV is negative, PI is less than 1 and IRR is less than cost of capital. So, both the projects should not be accepted.
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