(See attached file for full problem description)
NPV and IRR. A project that costs $3,000 to install will provide annual cash flows of $800 for each of the next 6 years.
Is this project worth pursuing if the discount rate is 10 percent?
How high can the discount rate be before you would reject the project?
Maximum Project Rate
Payback. A project that costs $2,500 to install will provide annual cash flows of $600 for the
next 6 years. The firm accepts projects with payback periods of less than 5 years.
Will the project be accepted?
Project payback period
Should this project be pursued if the discount rate is 2 percent?
NPV of Project at 2%
What if the discount rate is 12 percent?
NPV of Project at 12%
Will the firm's decision change as the discount rate changes?
Here are the cash flows for two mutually exclusive projects:
Project C0 C1 C2 C3
A ($20,000) $8,000 $8,000 $8,000
B ($20,000) 0 0 $25,000
Use the MS Excel NPV function to calculate the NPVs for both projects in the profile below. In part B use the IRR function.
a. At what interest rates would you prefer project A to B?
Rate NPVA NPVB
0% FORMULA FORMULA
2% FORMULA FORMULA
4% FORMULA FORMULA
6% FORMULA FORMULA
8% FORMULA FORMULA
10% FORMULA FORMULA
12% FORMULA FORMULA
14% FORMULA FORMULA
16% FORMULA FORMULA
18% FORMULA FORMULA
20% FORMULA FORMULA
b. What is the IRR of each project?
Project A IRR
Project B IRR
Profitability Index. Consider the following projects:
Project C0 C1 C2
A (2,100.00) 2,000.00 1,200.00
B (2,100.00) 1,440.00 1,728.00
a. Calculate the profitability index for A and B assuming a 22 percent opportunity cost of capital.
Project A NPV
Project B NPV
Project A Profitability Index
Project B Profitability Index
b. Use the profitability index rule to determine which project(s) you should accept (i) if you
could undertake both and (ii) if you could undertake only one.
You will find the answer to this puzzling question inside...