Time Period 0 1 2 3 4 Project A Cash Flow (1,000) 450 450 450 450 Project B Cash

Question

Time Period

0

1

2

3

4

Project A Cash Flow

(1,000)

450

450

450

450

Project B Cash Flow

(1,000)

0

0

0

2,000

Cost of capital 13%

1. Compute the NPV of project A (round answer to nearest dollar)

2. Compute the NPV of project B (round answer to nearest dollar)

3. Compute the IRR of project A (give answer as XX.XX%)

4. Compute the IRR of project B (give answer as XX.XX%)

5. Compute the MIRR of project A (give answer as XX.XX%)

6. Compute the MIRR of project B (give answer as XX.XX%)

7. Which project would you take if they were mutually exclusive?

8. Which project would you take if they were independent?

Time Period

0

1

2

3

4

Project A Cash Flow

(1,000)

450

450

450

450

Project B Cash Flow

(1,000)

0

0

0

2,000

Explanation / Answer

1. NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= $ 450 * 1/(1.13) ^ 1 + $ 450 * 1/(1.13) ^ 2 + $ 450 * 1/(1.13) ^ 3 +$ 450 * 1/(1.13) ^ 4 - $ 1,000

= $ 1,338.51 - $ 1,000

= $ 338.51

2.

NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= $2,000 * 1/(1.13) ^ 4 - $ 1,000

= $ 1,226.64- $ 1,000

= $ 226.64

3.

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

1,000=450/(1.0x) +450/ (1.0x)^2 +450 /(1.0x)^3 +450 /(1.0x)^ 4     

Or x= 28.50%

Hence the IRR is 28.50%

4.

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

1,000=0/(1.0x) +0/ (1.0x)^2 +0 /(1.0x)^3 +2,000 /(1.0x)^ 4     

Or x= 18.92%

Hence the IRR is 18.92%

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