12-3: Net Present Value (NPV) 12-4: Internal Rate of Return (IRR) Problem 12-7 N

Question

12-3: Net Present Value (NPV) 12-4: Internal Rate of Return (IRR)

Problem 12-7
NPV

Your division is considering two investment projects, each of which requires an up-front expenditure of $17 million. You estimate that the investments will produce the following net cash flows:

What are the two projects' net present values, assuming the cost of capital is 5%? Round your answers to the nearest dollar.
Project A $
Project B $

What are the two projects' net present values, assuming the cost of capital is 10%? Round your answers to the nearest dollar.
Project A $
Project B $

What are the two projects' net present values, assuming the cost of capital is 15%? Round your answers to the nearest dollar.
Project A $
Project B $

What are the two projects' IRRs at these same costs of capital? Round your answers to two decimal places.
Project A     %
Project B     %

Explanation / Answer

NPV@5%
Project A: -17+5/1.05+10/1.05^2+20/1.05^3=14.10895 million
Project B: -17+20/1.05+10/1.05^2+7/1.05^3=17.16478 million

NPV@10%
Project A: -17+5/1.1+10/1.1^2+20/1.1^3=10.83621 million
Project B: -17+20/1.1+10/1.1^2+7/1.1^3=14.70548 million

NPV@15%
Project A: -17+5/1.15+10/1.15^2+20/1.15^3=8.059587 million
Project B: -17+20/1.15+10/1.15^2+7/1.15^3=12.55535 million

IRR:
Project A:
0=-17+5/(1+IRR)+10/(1+IRR)^2+20/(1+IRR)^3
IRR=36.12%

Project B:
0=-17+20/(1+IRR)+10/(1+IRR)^2+7/(1+IRR)^3
IRR=67.46%

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