Question

NPV Your division is considering two projects with the following cash flows (in millions): 0 1 2 3 Project A -$20 $5 $9 $12 Project B -$13 $8 $7 $3 What are the projects' NPVs assuming the WACC is 5%? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Project A $ 5 million Project B $ 8 million What are the projects' NPVs assuming the WACC is 10%? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Project A $ million Project B $ million What are the projects' NPVs assuming the WACC is 15%? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Project A $ million Project B $ million What are the projects' IRRs assuming the WACC is 5%? Round your answer to two decimal places. Project A % Project B % What are the projects' IRRs assuming the WACC is 10%? Round your answer to two decimal places. Project A % Project B % What are the projects' IRRs assuming the WACC is 15%? Round your answer to two decimal places. Project A % Project B % If the WACC were 5% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 3.86%.) If the WACC were 10% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 3.86%.) If the WACC were 15% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 3.86%.)

Answer 1

NPV of Both Project at Different discount rate is calculated in excel and screen shot provided below:

At 5% discount rate, NPV of project A is $3.29 and NPV of project B is $3.56.

At 10% discount rate, NPV of project A is $1.00 and NPV of project B is $2.31.

At 15% discount rate, NPV of project A is -$0.96 and NPV of project B is $1.22.

b.

IRR calculation does not use discount rate. So, IRR value will be similar at all three discount rate. So, IRR of project is calculated in excel and screen shot provided below:

IRR of project A is 12.46% and IRR of project B is 21.49%.

c.

At 15% discount rate, NPV of project A is -$0.96 and NPV of project B is $1.22. at 15% discount rate, NPV of project B is higher than NPV of project A. So At 15% discount rate, project B should be accepted.