Question

Arrow Electronics is considering Projects S and L which are mutually exclusive, equally risky, and not repeatable. Project S has an initial cost of $1 million and cash inflows of $370,000 for 4 years, while Project L has an initial cost of $2 million and cash inflows of $720,000 for 4 years. The CEO wants to use the IRR criterion, while the CFO favors the NPV method, using a WACC of 8.02%. what is the difference between the npvs for these two projects?

Answer 1

S:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=370,000/1.0802+370,000/1.0802^2+370,000/1.0802^3+370,000/1.0802^4

=1224941.57

NPV=Present value of inflows-Present value of outflows

=1224941.57-1,000,000

=$224941.57(Approx)

L:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=720,000/1.0802+720,000/1.0802^2+720,000/1.0802^3+720,000/1.0802^4

=2383670.08

NPV=Present value of inflows-Present value of outflows

=2383670.08-2,000,000

=$383670.08(Approx)

Hence difference=383670.08-224941.57

=$158728.51(Approx)