Cash Flow (S) Discount Rate 0.00% 2.50% 5.00% 7.50% 10.00% 12.50% 15.00% 17.50%
ID: 2790529 • Letter: C
Question
Cash Flow (S) Discount Rate 0.00% 2.50% 5.00% 7.50% 10.00% 12.50% 15.00% 17.50% 20.00% 22.50% 25.00% 27.50% 30.00% NPV B 2,100.00 2 Year NPVA 3,700.00 Project A ProjectB $ $ 6 7 8 9 10 (9,800.00)$(4,900.00) 3,000.00 1,500.00 3,200.00 1,000.00 3,300.00 4,000.00 $4,000.00 500.00 12 14 15 16 17 18 19 20 21 23 24 Second: . Based on your profile table respond to the following questions why create a PV table, what do you learn from this table about the two projects? (2 points) Which project would you select to invest in if your required rate of return were 10.0%, and why? (2 points) Which project would you select to invest in if your required rate of return were 12.5%; why? (2 points) Third: . Calculate the IRR of both projects using the appropriate Excel function o Explain what the IRR tells you about the project? o If your required rate of return were 20% in which project would you invest: why?Explanation / Answer
1a) The NPV table is useful in that helps you understand at what discounts rate the project is feasible i.e having a positive NPV. So you calculate the NPV over various possible discount rates and then judge at what range of discount rate is the project worth undertaking.
1b) To evaluate the projects at a discount rate of 10% we will use the excel NPV function. The NPV function syntax is :
NPV=(rate,value1,value2…)
Where rate=discount rate=10%
value= refers to cash flow
Year
Project A
Project B
0
-9800
-4900
1
3000
1500
2
3200
1000
3
3300
4000
4
4000
500
NPV
$712.08
$578.95
Therefore, we will choose Project A as it has a higher NPV of $ 712.08 compared to Project B ‘s of $ 578.95.
1c) Using the same exercise as part b we will calculate NPV of the projects when discount rate is 12.5%.
Year
Project A
Project B
0
-9800
-4900
1
3000
1500
2
3200
1000
3
3300
4000
4
4000
500
NPV
$186.61
$306.61
Therefore, we will choose Project B as it has a higher NPV of $ 306.61 compared to Project A ‘s of $ 186.61.
1d) IRR is the rate at which the NPV of the project is zero. IRR is used to evaluate the attractiveness of the projects. Discount rates above IRR will make the project unfeasible, while below it will make it feasible. The excel syntax for IRR :
=IRR(values, guess)
values=cash flows
guess=optional argument. An initial guess at what IRR might be. Default is 10% in excel.
The IRR for both projects is shown below:
Year
Project A
Project B
0
-9800
-4900
1
3000
1500
2
3200
1000
3
3300
4000
4
4000
500
IRR
13%
16%
At the discount rate of 20%you will not undertake any project as the IRR of both the project is less than 20%.
Year
Project A
Project B
0
-9800
-4900
1
3000
1500
2
3200
1000
3
3300
4000
4
4000
500
NPV
$712.08
$578.95
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