ent Problem 10.35 Jekyll & Hyde Corp. management is evaluating two mutually excl
ID: 2800903 • Letter: E
Question
ent Problem 10.35 Jekyll & Hyde Corp. management is evaluating two mutually exclusive projects. The cost of capital is 15 percent. Costs and cash flows for each project 0 -$1,230,401-$1,247,869 225,000 356,000 381,000 356,000 447,000 356,000 543,000 356,000 5 751,000 356,000 gn, e.g. -45.25. Do not round discount factors. Round other Calculate NPV and IRR of two projects. (Enter negative amounts using negative si intermediate calculations and final answer to o decimal places, e.9. 1,525. Round IRR answers to 2 decimal places, e.g. 1 12.25%.) NPV of project 1 is $ NPV of project 2 is $ IRR of project 1 is IRR of project 2 is Jekyll and Hyde Corp. should acceptExplanation / Answer
CALCULATION OF PRESNT VALUE OF THE PROJECT 1 Years Cash Flows PVF @ 15% Present Value 0 -$12,30,401 1 -$12,30,401.00 1 $2,25,000 0.8696 $1,95,652.17 2 $3,81,000 0.7561 $2,88,090.74 3 $4,47,000 0.6575 $2,93,909.76 4 $5,43,000 0.5718 $3,10,462.01 5 $7,51,000 0.4972 $3,73,379.73 Net Present Value = $2,31,093.41 CALCULATION OF PRESNT VALUE OF THE PROJECT 2 Years Cash Flows PVF @ 15% Present Value 0 $ -12,47,869.00 1.0000 $ -12,47,869.00 1 $ 3,56,000.00 0.8696 $ 3,09,565.22 2 $ 3,56,000.00 0.7561 $ 2,69,187.15 3 $ 3,56,000.00 0.6575 $ 2,34,075.78 4 $ 3,56,000.00 0.5718 $ 2,03,544.16 5 $ 3,56,000.00 0.4972 $ 1,76,994.92 $ -54,501.79 IRR : IRR Means with a particular Percentage rate , At that point the present value become the zero CALCULATION OF THE IRR OF THE PROJECT 1 First we calculate randomly present value @ 21 % discounting rate Years Cash Flows PVF @ 21% Present Value 0 -$12,30,401 1 -$12,30,401.00 1 $2,25,000 0.8264 $1,85,950.41 2 $3,81,000 0.6830 $2,60,228.13 3 $4,47,000 0.5645 $2,52,319.85 4 $5,43,000 0.4665 $2,53,313.51 5 $7,51,000 0.3855 $2,89,543.01 Net Present Value = $10,953.90 With PVF of 21% we are getting positive = 10,953.90 First we calculate randomly present value @ 22 % discounting rate Years Cash Flows PVF @ 22% Present Value 0 -$12,30,401 1 -$12,30,401.00 1 $2,25,000 0.8197 $1,84,426.23 2 $3,81,000 0.6719 $2,55,979.58 3 $4,47,000 0.5507 $2,46,165.98 4 $5,43,000 0.4514 $2,45,109.70 5 $7,51,000 0.3700 $2,77,869.44 Net Present Value = -$20,850.07 With PVF of 22% we are getting negative = -20,850.07 In the given case the pv with 21% is coming to postive means the present value is more then 21% but with 22 Present value cash flow become negative so the present value is between 21% and 22% So the differecne in both the net present value is = $10,953.90 - -$20,850.07 Total is become = $31,803.98 So , the difference % = $10,953.90 "/"By $31,803.98 So , the difference % = 0.34 So, the IRR = 21.34% Answer = IRR = 21.34% CALCULATION OF THE IRR OF THE PROJECT 2 First we calculate randomly present value @ 13% discounting rate Years Cash Flows PVF @ 13% Present Value 0 $ -12,47,869.00 1 -$12,47,869.00 1 $ 3,56,000.00 0.8850 $3,15,044.25 2 $ 3,56,000.00 0.7831 $2,78,800.22 3 $ 3,56,000.00 0.6931 $2,46,725.86 4 $ 3,56,000.00 0.6133 $2,18,341.47 5 $ 3,56,000.00 0.5428 $1,93,222.54 Net Present Value = $4,265.33 With PVF of 13% we are getting positive = 4,265.33 Second we calculate randomly present value @ 14% discounting rate for negative PV Years Cash Flows PVF @ 14% Present Value 0 $ -12,47,869.00 1.0000 $ -12,47,869.00 1 $ 3,56,000.00 0.8772 $ 3,12,280.70 2 $ 3,56,000.00 0.7695 $ 2,73,930.44 3 $ 3,56,000.00 0.6750 $ 2,40,289.86 4 $ 3,56,000.00 0.5921 $ 2,10,780.58 5 $ 3,56,000.00 0.5194 $ 1,84,895.24 Net Present Value = -$25,692.18 With PVF of14% we are getting negative = -25,692.18 In the given case the pv with 13% is coming to postive means the present value is more then 13% but with 14 Present value cash flow become negative so the present value is between 12% and 14% So the differecne in both the net present value is = $4,265.33 - -$25,692.18 Total is become = $29,957.50 So , the difference % = $4,265.33 "/"By $29,957.50 So , the difference % = 0.14 So, the IRR = 13.14% Answer = IRR = 13.14% SUMMARY OF THE ANSWER IS AS BELOW NPV IRR Proejct 1 $2,31,093.41 21.34% Proejct 2 -$54,501.79 13.14% On the Basis of the IRR Project 1 have the greater IRR so we can select the Project 1
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