The founders of a business are interested in investing in a project in the comin
ID: 3374692 • Letter: T
Question
The founders of a business are interested in investing in a project in the coming year. The two projects are mutually exclusive. The estimated cash flows of the two projects are shown below. The company's Weighted Average Cost of Capital (WACC) is 9%.
The table below shows the data from the previous spreadsheet exercise and the correct IRR calculation.
Which project should the company undertake?
PROJECT 1 PROJECT 2 t Cash Flows t Cash Flows 0 ($300,000) 0 ($120,000) 1 $30,000 1 $40,000 2 $45,000 2 $40,000 3 $60,000 3 $25,000 4 $60,000 4 $20,000 5 $60,000 5 $10,000 6 $60,000 6 $10,000 7 $120,000 7 $10,000 IRR: 8.55% IRR: 9.60%Explanation / Answer
Solution
NPV of project 1 = -300,000 + 30,000 (1.0855)-1+..............+120000(1.0855)-7 = 10.64
NPV of project 2 = -120,000 + 40,000 (1.096)-1 +.........+ 10000(1.096)-7 = 2.95
Company should choose project 1 as NPVof project 1 > NPV of project 2
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