1. Burns Auto has the following two mutually exclusive projects available rojeet
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Question
1. Burns Auto has the following two mutually exclusive projects available rojeet 60,000 21,000 24,000 17000 11,000 9,000 ear Projeet 5,000 9,000 21,000 30,000 7,000 3,000 a. What is the IRR for both the projects? Using IRR decision rule, which project will you choose? (3 points) Ans: b. What is the NPV for each of the projects at 10%, which project will you choose if you apply the NPV de- cision rule? (3 points) Ans: c. Sketch the NPV profiles for R and S over a range of discount rates. (3 points)Explanation / Answer
Calculation of IRR=
Under IRR, NPV=O
P.v of cash inflow-cash out flow=0
Value of IRR will be calculated by trial and error method
PROJECT R
Assume IRR as 13%
NPV=
-60000-(21000×.885+24000×.783+17000×.693+11000×.613+9000×.543)
=-60000-(60788)
=788
Let’s assume IRR be 14%
Npv=-60000-(21000×.877+24000×.769+17000×.675+11000×.592+9000×.519)
=-60000-(59531)
=-469
So it can be concluded that IRR lies between 13% and 14%
=13 %+( 14%-13%) 788/1257 (60788-59531=1257)
=13%+1%×.626
=13.626%
PROJECT R IRR=13.626%
PROJECT S
Let us assume IRR as 12%
(-85000)-(19000×.893+21000×.797+30000×.712+37000×.636+13000×.567)
=(-85000)-85967
=967
Let us assume IRR as 13%
(-85000)-(19000×.885+21000×.783+30000×.693+37000×.613+13000×.543)
=(-85000)-83788
=-1212
So IRR lies between 12% and 13%
IRR=12 %+(135-12%)967/2179
=12%+.44%
=12.44%
PROJECT S IRR=12.44%
CALCULATION OF NPV
PROJECT R
NPV=PV OF CASH INFLOW-CASH OUT FLOW
= (21000×.9.09+24000×.826+17000×.751+11000×.683+9000×.621)-60000
=64782-60000
=4782
PROJECT S
NPV=
(19000×.909+21000×.826+30000×.751+37000×.683+13000×.621)-85000
=90491-85000
=5491
Since project s NPV is more PROJECT S must be chosen
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