Problem 9LO330 similar to E Question Heip NPV b proftability

Problem 9.LO3.30 (similar to) E Question Heip NPV), (b) proftability index (Pl), and (e) intermal rate of retum (RR) for Projects 1 and 2 (cash flows shown below), assuming a Calculate the (a) net present value ( required return of 12%. Project 1 $410 $170 $190 $190 $330 Year Project 2 $400 $160 $120 $190 $300 a. What is the NPV of Project 1 S 238 21 (Round to the nearest cent) What is the NPV of Project 2? (Round to the nearest cent)

Solution

Answer to Problem 9.LO3.30:

Answer a.

Project 1:

Required Return = 12%

NPV = -$410 + $170/1.12 + $190/1.12^2 + $190/1.12^3 + $330/1.12^4
NPV = $238.21

Project 2:

NPV = -$400 + $160/1.12 + $120/1.12^2 + $190/1.12^3 + $300/1.12^4
NPV = $164.41

Answer b.

Project 1:

Present Value of Cash Inflows = $170/1.12 + $190/1.12^2 + $190/1.12^3 + $330/1.12^4
Present Value of Cash Inflows = $648.21

Profitability Index = Present Value of Cash Inflows / Initial Investment
Profitability Index = $648.21 / $410
Profitability Index = 1.58

Project 2:

Present Value of Cash Inflows = $160/1.12 + $120/1.12^2 + $190/1.12^3 + $300/1.12^4
Present Value of Cash Inflows = $564.41

Profitability Index = Present Value of Cash Inflows / Initial Investment
Profitability Index = $564.41 / $400
Profitability Index = 1.41

Answer c.

Project 1:

Let IRR be i%

NPV = -$410 + $170/(1+i) + $190/(1+i)^2 + $190/(1+i)^3 + $330/(1+i)^4
0 = -$410 + $170/(1+i) + $190/(1+i)^2 + $190/(1+i)^3 + $330/(1+i)^4

Using financial calculator, i = 34.55%

So, IRR of Project 1 is 34.55%

Project 2:

Let IRR be i%

NPV = -$400 + $160/(1+i) + $120/(1+i)^2 + $190/(1+i)^3 + $300/(1+i)^4
0 = -$400 + $160/(1+i) + $120/(1+i)^2 + $190/(1+i)^3 + $300/(1+i)^4

Using financial calculator, i = 28.08%

So, IRR of Project 2 is 28.08%