Fin 534 Homework Set 20

2 EXPECTED NET CASH FLOWS: 3 Year Project A Project B 40 ($400) ($650) 5 1-528 210 6 2-219 210 7 3-150 210 8 4 1,100 210 9 5 820 210 10 6 990 210 11 7-325 210 Assume you are presented with the mutually exclusive investments whose expected net cash fows are as shown above. 2 EXPECTED NET CASH FLOWS: 3 Year Project A Project B IRR Proj A IRR Proj B 40 ($400) ($650) 5 1-528 210 6 2-219 210 7 3-150 210 8 4 1,100 210 9 5 820 210 10 6 990 210 11 7-325 210 12 20.65% 25.84% Using IRR from 0% to 30% to construct the NPV Profiles of Project A and Project B 2 EXPECTED NET CASH FLOWS: 3 Year Project A Project B 40 ($400) ($650) 5 1-528 210 6 2-219 210 7 3-150 210 8 4 1,100 210 9 5 820 210 10 6 990 210 11 7-325 210 12 13 14 Discount Rates NPV Project A 15 0.00% $1,228.00 $820.00 16 1.00% $1,172.01 $755.37 17 2.00% $1,064.31 $695.21 18 3.00% $964.28 $639.18 19 4.00% $871.33 $586.95 20 5.00% $784.93 $538.23 21 6.00% $704.58 $492.74 22 7.00% $629.84 $450.23 23 8.00% $560.30 $410.50 24 9.00% $495.57 $373.32 25 10.00% $435.30 $338.52 26 11.00% $379.18 $305.91 27 12.00% $326.90 $275.35 28 13.00% $278.20 $246.68 29 14.00% $232.81 $219.78 2 EXPECTED NET CASH FLOWS: 3 Year Project A Project B IRR Proj A IRR Proj B 40 ($400) ($650) 5 1-528 210 6 2-219 210 7 3-150 210 8 4 1,100 210 9 5 820 210 10 6 990 210 11 7-325 210 12 20.65% 25.84% QUESTION #1 : Construct NPV Profiles for Projects A and B NPV Project B

Q:1 Year Project A Project B Project A Project B0-400-650 250 IRR IRR Both Projects IRR 1-528 210-738 20.65% 25.84% 14.76% 2-219 210-429 3-150 210-360 4 1100 210 890 Cost A 10% Cost B 10% 5 820 210 610 $878.83 $1,022.37 6 990 210 780 7-325 210-535 Cost A 17% Cost B 17% $533.76 $823.70 Discount Rate Discount Rate NPV A NPV B 10.00% 10.00% $1,688.00 $1,470.00 $878.83 $1,022.37 Discount Rate Discount Rate 17.00% 17.00% $533.76 $823.70 Assume you are presented with the following mutually exclusive investments whose expected net cash Fows are as follows: EXPECTED NET CASH ±LOWS: (a) What is each project’s IRR? (b) If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, Project A – 20.65% If 10% Project B Project B – 25.84% If 17% Project B Both Projects – 14.76% Assume you are presented with the following mutually exclusive investments whose expected net cash Fows are as follows:

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