Your division is considering two investment projects each of

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 E s 6,000,000 10,000,000 20,000,000 $20,000,000 10,000,000 7,000,000 a. what are the two projects\' net present values, assuming the cost of capital is 596? 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 B

Solution

a. at 5% Project A $ 1,50,61,332 Project B $ 1,71,64,777 At 10% Project A $ 1,17,45,304 Project B $ 1,47,05,485 at 15% Project A $     89,29,153 Project B $ 1,25,55,355 b. IRR Project A 39.26% Project B 68.70% Workings: at Cost of Capital of 5% Project A Project B Year Cash flow Discount factor Present Value Year Cash flow Discount factor Present Value a b c=1.05^-a d=b*c a b c=1.05^-a d=b*c 0 $ -1,70,00,000                 1.000 $ -1,70,00,000 0 $                 -1,70,00,000                 1.000 $       -1,70,00,000 1 $       60,00,000                 0.952 $        57,14,286 1 $                   2,00,00,000                 0.952 $         1,90,47,619 2 $   1,00,00,000                 0.907 $        90,70,295 2 $                   1,00,00,000                 0.907 $             90,70,295 3 $   2,00,00,000                 0.864 $    1,72,76,752 3 $                       70,00,000                 0.864 $             60,46,863 Net Present Value $    1,50,61,332 Net Present Value $         1,71,64,777 at Cost of Capital of 10% Project A Project B Year Cash flow Discount factor Present Value Year Cash flow Discount factor Present Value a b c=1.10^-a d=b*c a b c=1.10^-a d=b*c 0 $ -1,70,00,000                 1.000 $ -1,70,00,000 0 $                 -1,70,00,000                 1.000 $       -1,70,00,000 1 $       60,00,000                 0.909 $        54,54,545 1 $                   2,00,00,000                 0.909 $         1,81,81,818 2 $   1,00,00,000                 0.826 $        82,64,463 2 $                   1,00,00,000                 0.826 $             82,64,463 3 $   2,00,00,000                 0.751 $    1,50,26,296 3 $                       70,00,000                 0.751 $             52,59,204 Net Present Value $    1,17,45,304 Net Present Value $         1,47,05,485 at Cost of Capital of 15% Project A Project B Year Cash flow Discount factor Present Value Year Cash flow Discount factor Present Value a b c=1.15^-a d=b*c a b c=1.15^-a d=b*c 0 $ -1,70,00,000                 1.000 $ -1,70,00,000 0 $                 -1,70,00,000                 1.000 $       -1,70,00,000 1 $       60,00,000                 0.870 $        52,17,391 1 $                   2,00,00,000                 0.870 $         1,73,91,304 2 $   1,00,00,000                 0.756 $        75,61,437 2 $                   1,00,00,000                 0.756 $             75,61,437 3 $   2,00,00,000                 0.658 $    1,31,50,325 3 $                       70,00,000                 0.658 $             46,02,614 Net Present Value $        89,29,153 Net Present Value $         1,25,55,355 at Cost of Capital of 40% at Cost of Capital of 70% Project A Project B Year Cash flow Discount factor Present Value Year Cash flow Discount factor Present Value a b c=1.40^-a d=b*c a b c=1.70^-a d=b*c 0 $ -1,70,00,000                 1.000 $ -1,70,00,000 0 $                 -1,70,00,000                 1.000 $       -1,70,00,000 1 $       60,00,000                 0.714 $        42,85,714 1 $                   2,00,00,000                 0.588 $         1,17,64,706 2 $   1,00,00,000                 0.510 $        51,02,041 2 $                   1,00,00,000                 0.346 $             34,60,208 3 $   2,00,00,000                 0.364 $        72,88,630 3 $                       70,00,000                 0.204 $             14,24,791 Net Present Value $        -3,23,615 Net Present Value $             -3,50,295 IRR is the rate at which net present value is zero.Discount rate and Net Present value has adverse ratio.It means as Discount rate increases, net present value decreases. Project A Project B At 5% At 10% At 15% At 5% At 10% At 15% Net Present Value $ 1,50,61,332 $                  1,17,45,304 $        89,29,153 Net Present Value $ 1,71,64,777 $ 1,47,05,485 $         1,25,55,355 IRR = L+(H-L)*(A/(A-B)) Where, IRR = L+(H-L)*(A/(A-B)) Where, = 5%+(40%-5%)*(15061332/15384948) L 5% = 5%+(70%-5%)*(17164777/17515072) L 5% = 39.26% H 40% = 68.70% H 70% A $ 1,50,61,332 A $         1,71,64,777 B $     -3,23,615 B $             -3,50,295 A-B $ 1,53,84,948 A-B $         1,75,15,072