Apex Semiconductor Inc. (ASI) is evaluating two proposed projects, Sand L.Table

Question

Apex Semiconductor Inc. (ASI) is evaluating two proposed projects, Sand L.Table 1 provides some simplified data on two projects. Both involve developing a new computer chip, but with different ways of handling the operation. Under plan S, the project would be accelarated; hence itwould have high sales in Year 1. However, under Sthe firm's competitors would learn aboutthe product relatively soon, and sales would decline as competitors began to produce similar chips. Therefore, S's cash flows decline over its 4-year life. Under Project L, things would be handled differently. Here, PNC would operate slowly, carefully, and securely, and customers would be locked in through long-term contracts. Thus under L, sales and cash flows would rise over time. Even so, new products would eventually replace this chip, so L would also have a 4-year life. Financial analysts have estimated ASI's weighted cost of capital (WACC) to be 8.71%. Table 1. Cash Flows for Projects S and L Project S Year (t) Net cash flow Proiect L Year (t) Net cash flow ($100,000 $10,000 20,000 $50,000 $75,750

Explanation / Answer

Using BA II plus calculator to solve this sum:

Project S:

CF0= -100000, CF1= 82270, CF2= 30000, CF3= 10000, CF4= 10000 I =8.71, NPV CPT. IRR CPT

NPV= $ 16007.65

IRR= 20%

ProjectL:

CF0= -100000, CF1= 10000, CF2= 20000, CF3= 50000 CF4= 75750, I = 8.71%, NPV CPT IRR CPT

NPV= $19279.42

IRR=15%

NPV is the absolute value which directly adds to the wealth of shareholders and IRR is the relative value. in case of 2 projects conflicts occurs between IRR & NPV.

If the project is mutually exclusive we should accept the project having higher NPV that is Project L.

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