Question

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: $__

2. 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

Answer 1

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%