Your division Queston 1 (15 Marks Your division is considering two projects The

Question

Your division

Queston 1 (15 Marks Your division is considering two projects The WAC is 10%, and the projects' after-tax cash tows (n mallions of rands) would be as tollows Project A -R30 Projct B Year R30 20 10 10 Required 11 Calculate the projects' NPVs, regular paybacks, and discounted paybacks 12 If the two projects are independent, which project(s) should be chosen? 13 If the two projects are mutually exclusive which project(s) should be chosen? 14 Is it possible for conflicts to exist between the NPV and the IRR when independent projects are (10) being evaluatod? Explain your answer Now look at the regular and discounted paybacks Which project looks better when judged by the paybacks? 15

Explanation / Answer

1)

Project A:

NPV = Present value of cash inflows - present value of cash outflows

NPV = -30 + 5 / ( 1 + 0.1)1 + 10 / ( 1 + 0.1)2 + 15 / ( 1 + 0.1)3 + 20 / ( 1 + 0.1)4

NPV = -30 + 4.545 + 8.264 + 11.27 + 13.66

NPV = $7.739

Regular payback:

Cumulative cash flow for year 0 = -30

Cumulative cash flow for year 1 = -30 + 5 = -25

Cumulative cash flow for year 2 = -25 + 10 = -15

Cumulatiev cash flow for year 3 = -15 + 15 = 0

Regular payback = 3 years

Discounted payback:

Cumulative cash flow for year 1 = -30 + 4.545 = -25.455

Cumulative cash flow for year 2 = -25.455 + 8.264 = -17.191

Cumulatiev cash flow for year 3 = -17.191 + 11.27 = -5.921

Cumulative cash flow for year 4 = -5.921 + 13.66 = 7.739

5.921 / 13.66 = 0.43

Discounted payback = 3 + 0.43 = 3.43 years

Project B:

NPV = Present value of cash inflows - present value of cash outflows

NPV = -30 + 20 / ( 1 + 0.1)1 + 10 / ( 1 + 0.1)2 + 8 / ( 1 + 0.1)3 + 6 / ( 1 + 0.1)4

NPV = -30 + 18.18 + 8.264 + 6.01 + 4.1

NPV = $6.55

Regular payback:

Cumulative cash flow for year 0 = -30

Cumulative cash flow for year 1 = -30 + 20 = -10

Regular payback = 2 years

Discounted payback:

Cumulative cash flow for year 1 = -30 + 18.18 = -11.82

Cumulative cash flow for year 2 = -11.82 + 8.264 = -3.556

Cumulatiev cash flow for year 3 = -3.556 + 6.01 = 2.454

3.556 / 6.01 = 0.59

Discounted payback = 2 + 0.59 = 2.59 years

b)

If two projects are independent, both projects can be chosen as both have positive NPV.

c)

If projects were mutually exclusive, project A should be chosen as it has a higher NPV

d)

When projects are independed, conflicts between NPV and IRR will NOT happen, A project with a positive NPV will have an IRR greater than WACC. A project with negative NPV will have an IRR less than WACC.

e)

When judged by the paybacks, project B should be chosen as it has lower paybacks.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.