7. Problem 10-07 eBook Problem 10-07 NPV Your division is considering two invest
ID: 2820613 • Letter: 7
Question
7. Problem 10-07 eBook Problem 10-07 NPV Your division is considering two investment projects, each of which requires an up-front expenditure of $17 million. You estimate that the investments will produce the following net cash flows Year Project A Project B $ 5,000,000 $20,000,000 10,000,000 7,000,000 10,000,000 a. what are the two projects' net present values, assuming the cost of capital is 5%? Round your answers to the nearest dollar. Project A $ Project B $ What are the two projects' net present values, assuming the cost of capital is 10%? Round your answers to the nearest dollar. Project A Project B$ What are the two projects' net present values, assuming the cost of capital is 15%? Round your answers to the nearest dollar. Project A $ Project B$ b. What are the two projects' IRRs at these same costs of capital? Round your answers to two decimal places. Project A Project BExplanation / Answer
a.
1.
For project A: $14,108,952
Discount rate = R =
5.00%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$17,000,000.00
1.000000
-$17,000,000
1
$5,000,000.00
0.952381
$4,761,905
2
$10,000,000.00
0.907029
$9,070,295
3
$20,000,000.00
0.863838
$17,276,752
Total of PV = NPV =
$14,108,952
For Project B: $17,164,777
IRR = R =
5.00000%
Present Values
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$17,000,000.00
1.000000
-$17,000,000.00
1
$20,000,000.00
0.952381
$19,047,619.05
2
$10,000,000.00
0.907029
$9,070,294.78
3
$7,000,000.00
0.863838
$6,046,863.19
Total of Present values = NPV =
$17,164,777
2.
For Project A: $10,836,213
Discount rate = R =
10.00%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$17,000,000.00
1.000000
-$17,000,000
1
$5,000,000.00
0.909091
$4,545,455
2
$10,000,000.00
0.826446
$8,264,463
3
$20,000,000.00
0.751315
$15,026,296
Total of PV = NPV =
$10,836,213
For Project B: $14,705,485
IRR = R =
10.00000%
Present Values
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$17,000,000.00
1.000000
-$17,000,000.00
1
$20,000,000.00
0.909091
$18,181,818.18
2
$10,000,000.00
0.826446
$8,264,462.81
3
$7,000,000.00
0.751315
$5,259,203.61
Total of Present values = NPV =
$14,705,485
3.
For Project A: $8,059,587
Discount rate = R =
15.00%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$17,000,000.00
1.000000
-$17,000,000
1
$5,000,000.00
0.869565
$4,347,826
2
$10,000,000.00
0.756144
$7,561,437
3
$20,000,000.00
0.657516
$13,150,325
Total of PV = NPV =
$8,059,587
For Project B: $12,555,355
IRR = R =
15.00000%
Present Values
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$17,000,000.00
1.000000
-$17,000,000.00
1
$20,000,000.00
0.869565
$17,391,304.35
2
$10,000,000.00
0.756144
$7,561,436.67
3
$7,000,000.00
0.657516
$4,602,613.63
Total of Present values = NPV =
$12,555,355
b.
IRR is obtained from trial and error method we have to fix such rate for discount that it forces NPV = 0 or sum of all cash flows equal to zero
For Project A: 36.12%
Discount rate = R =
36.12%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$17,000,000.00
1.000000
-$17,000,000
1
$5,000,000.00
0.734644
$3,673,219
2
$10,000,000.00
0.539701
$5,397,015
3
$20,000,000.00
0.396488
$7,929,766
Total of PV = NPV =
$0
For Project B: 67.46%
IRR = R =
67.46%
Present Values
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$17,000,000.00
1.000000
-$17,000,000.00
1
$20,000,000.00
0.597164
$11,943,285.35
2
$10,000,000.00
0.356605
$3,566,051.62
3
$7,000,000.00
0.212952
$1,490,663.02
Total of Present values = NPV =
$0
Discount rate = R =
5.00%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$17,000,000.00
1.000000
-$17,000,000
1
$5,000,000.00
0.952381
$4,761,905
2
$10,000,000.00
0.907029
$9,070,295
3
$20,000,000.00
0.863838
$17,276,752
Total of PV = NPV =
$14,108,952
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