Problem 10.35 Jekyll & Hyde Corp. management is evaluating two mutually exclusiv

Question

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 are given in the following table. Year Project 1 Project 2 0 $1,374,115 -$1,212,482 347,000 347,000 347,000 347,000 347,000 270,000 330,000 488,000 535,000 817,000 Calculate NPV and IRR of two projects. (Enter negative amounts using negative sign, e.g.-45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525. Round IRR answers to 2 decimal places, eg. 15.25 or 12.25%.) NPV of project 1 is s NPV of project 2 is S IRR of project 1 is IRR of project 2 is Which project should be accepted? Jekyll and Hyde Corp. should accept

Explanation / Answer

Project 1:

We can use the financial calculator

In the financial calculator

Press CF then Press 2nd then press CLR Work

Now input the values

CFO = - 1,374,115 , Press enter and then press down arrow

Note CF0 is negative as it is an outlay

CF1 = 270,000, Press enter and then press down arrow

F01 = 01 , Press enter and then press down arrow

CF2 = 330,000 , Press enter and then press down arrow

F02 = 01 , Press enter and then press down arrow

CF3 = 488,000, Press enter and then press down arrow

F03 = 01 , Press enter and then press down arrow

CF4 = 535,000 , Press enter and then press down arrow

F04 = 01 , Press enter and then press down arrow

CF5 = 817,000, Press enter and then press down arrow

F05 = 01 , Press enter and then press down arrow

Now Press NPV

Input I = 15 Press enter and then press down arrow

NPV gets reflected

Now press CPT

We get NPV as 143,144.31

NPV of project 1 is 143,144.31

Similarly for IRR, follow these steps,

Input the values

CFO = - 1,374,115 , Press enter and then press down arrow

Note CF0 is negative as it is an outlay

CF1 = 270,000, Press enter and then press down arrow

F01 = 01 , Press enter and then press down arrow

CF2 = 330,000 , Press enter and then press down arrow

F02 = 01 , Press enter and then press down arrow

CF3 = 488,000, Press enter and then press down arrow

F03 = 01 , Press enter and then press down arrow

CF4 = 535,000 , Press enter and then press down arrow

F04 = 01 , Press enter and then press down arrow

CF5 = 817,000, Press enter and then press down arrow

F05 = 01 , Press enter and then press down arrow

Now Press IRR

Now press CPT

We get IRR as 18.58%

IRR of the project 1 is 18.58%

Follow the similar steps for Project 2 as well

Project 2:

Now input the values

CFO = - 1,212,482 Press enter and then press down arrow

Note CF0 is negative as it is an outlay

CF1 = 347,000 , Press enter and then press down arrow

F01 = 5 , Press enter

Now Press NPV

Input I = 15 Press enter and then press down arrow

NPV gets reflected

Now press CPT

We get NPV as -49,284.18

NPV of the project 2 is -49,284.18

For IRR

CFO = - 1,212,482 Press enter and then press down arrow

Note CF0 is negative as it is an outlay

CF1 = 347,000 , Press enter and then press down arrow

F01 = 5 , Press enter

Press IRR

Press CPT

We get IRR as 13.27%

IRR of the project 2 is 13.27%

Project 1 should be selected as it has positive NPV.

Projects with negative NPV should be rejected

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