Question

7. Your division is considering two investment projects, each of which requires an up-front expenditure of...

7. 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 B 1 \$ 4,000,000 \$20,000,000 2 10,000,000 10,000,000 3 20,000,000 6,000,000
1. What are the two projects' net present values, assuming the cost of capital is 5%? Do not round intermediate calculations. 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%? Do not round intermediate calculations. 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%? Do not round intermediate calculations. Round your answers to the nearest dollar.

Project A: \$__

Project B: \$__

1. What are the two projects' IRRs at these same costs of capital? Do not round intermediate calculations. Round your answers to two decimal places.

Project A:    __ %

Project B:    __%

8. Edelman Engineering is considering including two pieces of equipment, a truck, and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is \$15,000, and that for the pulley system is \$21,000. The firm's cost of capital is 11%. After-tax cash flows, including depreciation, are as follows:

 Year Truck Pulley 1 \$5,100 \$7,500 2 5,100 7,500 3 5,100 7,500 4 5,100 7,500 5 5,100 7,500

Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept/reject decision for each. Do not round intermediate calculations. Round the monetary values to the nearest dollar and percentage values to two decimal places. Use a minus sign to enter negative values, if any.

 Truck Pulley Value Decision Value Decision IRR __% (select one) Accept/Reject __ % (select one)Accept/Reject NPV \$__ (select one) Accept/Reject \$ __ (select one) Accept/Reject MIRR __% (select one) Accept/Reject __% (select one)Accept/Reject

7 a) At the cost of capital of 5%

NPV of A (in million \$) = -17+ 4/1.05+10/1.05^2+20/1.05^3

=\$13.15657056 million

or \$13,156,571

NPV of B (in million \$) = -17+ 20/1.05+10/1.05^2+6/1.05^3

=\$16.3009394 million

or \$16,300,939

At the cost of capital of 10%

NPV of A (in million \$) = -17+ 4/1.1+10/1.1^2+20/1.1^3

=\$9.927122 million

or \$9,927,122

NPV of B (in million \$) = -17+ 20/1.1+10/1.1^2+6/1.1^3

=\$13.954170 million

or \$13,954,170

At the cost of capital of 15%

NPV of A (in million \$) = -17+ 4/1.15+10/1.15^2+20/1.15^3

=\$7.190022 million

or \$7,190,022

NPV of B (in million \$) = -17+ 20/1.15+10/1.15^2+6/1.15^3

=\$11.897838 million

or \$11,897,838

IRR is the discount rate at which NPV =0

IRR (r) of project A is given by

-17+4/(1+r)+10/(1+r)^2+20/(1+r)^3 = 0

From SOLVER in excel OR by using hit and trial method,

r = 0.3354 or 33.54%

IRR of project A = 33.54%

IRR (r) of project B is given by

-17+20/(1+r)+10/(1+r)^2+6/(1+r)^3 = 0

From SOLVER in excel OR by using hit and trial method,

r = 0.6592 or 65.92%

IRR of project B = 65.92%