A company is considering two mutually exclusive projects that have the following cash flows: Year Project A Cash Flow Project...

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Finance

A company is considering two mutually exclusive projects thathave the following cash flows:
Year                      Project A CashFlow                     Project B Cash Flow
0                             -$10,000                                           -$8,000
1                                  1000                                              7000
2                                  2000                                              1000
3                                  6000                                               1000
4                                  6000                                               1000
If the company’s required rate of return is 10%, find theproject’s NPV, IRR, PI, and payback period. Which project theyshould invest in?

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3.6 Ratings (429 Votes)

Firstly we will calculate the NPV of both projects Projects A NPV 10000 1000 1101 2000 1102 6000 1103 6000 1104 116795 Projects B NPV 8000 7000 1101 1000 1102 1000 1103 1000 1104 62441 In order to compute the IRR the NPV of the projects shall be equal to zero IRR of project A Lets calculate the project NPV by taking a hypotheticaly rate of 12 10000 1000 1121 2000 1122 6000 1123 6000 1124 57103 Now lets calculate the project NPV by taking a hypotheticaly rate of 15 10000 1000 1151 2000 1152 6000 1153 6000 1154 24253 Now we can see that the IRR shall be See Answer

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Transcribed Image Text

A company is considering two mutually exclusive projects thathave the following cash flows:Year Project A CashFlow Project B Cash Flow0 -$10,000 -$8,0001 1000 70002 2000 1000 3 6000 10004 6000 1000If the company’s required rate of return is 10%, find theproject’s NPV, IRR, PI, and payback period. Which project theyshould invest in?