Question

Skiba Company is thinking about two different modifications to its current manufacturing process. The after-tax cash flows associated with the two investments follow:

Year |
Project I |
Project II |
||

0 | $(100,000) | $(100,000) | ||

1 | — | 63,857 | ||

2 | 134,560 | 63,857 |

Skiba's cost of capital is 8%.

Required: 1. Compute the NPV and the IRR for each investment. Round present value calculations and your final NPV answers to the nearest dollar. Round IRR answers to the nearest whole percent.

Answer #1

Calculation of net present value | |||

year | pv factor | present value | |

0 | -100000 | 1 | -100000 |

2 | 134560 | 0.85734 | 115364 |

net present value = present value of cash inflow-outflow | |||

net present value = 115364-100000 = 15364 | |||

IRR | |||

initial investment = cash inflow at the end yr2*pvf(i%,2yr) | |||

100000 = 134560*pvf(i%,2 yrs) | |||

Pvf(i%,2yrs) = 100000/134560 = 0.74316 | |||

IRR = 16% | |||

Project II | |||

year | Pvf | present value | |

0 | -100000 | 1 | -100000 |

1-2 | 63857 | 1.78326 | 113874 |

Net present value = 113874-100000 = 13874 | |||

IRR | |||

100000 = 63857*pvaf(i%,2yrs) | |||

pvaf (i%,2yr) = 100000/63857 | |||

pvaf (i%,2yr) = 1.5660 | |||

IRR = 18% |

Net Present Value Versus Internal Rate of Return
For discount factors use Exhibit 12B-1 and Exhibit 12B-2.
Skiba Company is thinking about two different modifications to
its current manufacturing process. The after-tax cash flows
associated with the two investments follow:
Year
Project I
Project II
0
$(100,000)
$(100,000)
1
—
63,857
2
134,560
63,857
Skiba's cost of capital is 12%.
Required:
1. Compute the NPV and the IRR for each
investment. Round present value calculations and your final NPV
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