Question

# Reddington Enterprises is considering two capital Budget projects with the following cashflows at a WACC of...

Reddington Enterprises is considering two capital Budget projects with the following cashflows at a WACC of 12%. At what rates do these projects have the same NPV?

Red Wine Vineyards Kaplan Cleaners

0 -200,000 -200,000

1 50,000 175,000

2 125,000 125,000

3 200,000 100,000

4 300,000 75,000

A. 12.0%

B. 43.4%

C. 19.5%

D. 25.7%

E. 32.8%

Let both project will have same NPV at i%

Red Wine Vineyards:

Cash Flows:
Year 0 = -\$200,000
Year 1 = \$50,000
Year 2 = \$125,000
Year 3 = \$200,000
Year 4 = \$300,000

NPV = -\$200,000 + \$50,000/(1+i) + \$125,000/(1+i)^2 + \$200,000/(1+i)^3 + \$300,000/(1+i)^4

Kaplan Cleaners:

Cash Flows:
Year 0 = -\$200,000
Year 1 = \$175,000
Year 2 = \$125,000
Year 3 = \$100,000
Year 4 = \$75,000

NPV = -\$200,000 + \$175,000/(1+i) + \$125,000/(1+i)^2 + \$100,000/(1+i)^3 + \$75,000/(1+i)^4

NPV of Red Wine Vineyards = NPV of Kaplan Cleaners
-\$200,000 + \$50,000/(1+i) + \$125,000/(1+i)^2 + \$200,000/(1+i)^3 + \$300,000/(1+i)^4 = -\$200,000 + \$175,000/(1+i) + \$125,000/(1+i)^2 + \$100,000/(1+i)^3 + \$75,000/(1+i)^4
0 = -\$125,000/(1+i) + \$0/(1+i)^2 + \$100,000/(1+i)^3 + \$225,000/(1+i)^4
0 = -\$125,000 + \$0/(1+i) + \$100,000/(1+i)^2 + \$225,000/(1+i)^3

Using financial calculator, i = 43.4%

So, both projects will have same NPV at 43.4%

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