All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is consi
ID: 1170495 • Letter: A
Question
All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is considering two mutually exclusive projects, each with an initial investment of $180,000 The company's board of directors has set a 4-year payback requirement and has set its cost of capital at 8%. The cash inflows associated with the two projects are shown in the following table: EEB a. Calculate the payback period for each project. Rank the projects by payback period b. Calculate the NPV of each project. Rank the project by NPV c. Calculate the IRR of each project. Rank the project by IRR. d. Make a recommendation Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Cash inflows (CF) Project A $60,000 $60,000 $60,000 $60,000 $60,000 $60,000 Year Project B $65,000 $70,000 $50,000 $50,000 $50,000 $50,000 4 Check AnswerExplanation / Answer
Calculated on Excel sheet. PVA formula = 1/(1+R)n
PayBack period for Project A = 60000+60000+60000 = $180000 -Investment = 0
Payback period for Project A is 3 years
Payback period for Project B will be
65000+70000 = $ 1,35,000 for remaining $45,000 to recover we need to enter in 3rd year
45000/50000*12 = 10.8 months
So payback Period will be 2 Years and 10.8 months
NPV for Project A will be $ 97421.69 while NPV for Project B will be $ 82220.41 and Rank will be 1st rank - Project A while Project B will be 2nd Rank
IRR calculation
Cashflow1/(1+r) + Cash flow2/(1+r)2............= NPV =0
And At the rate of 25 %
So IRR is between 24 % and 25 % for Project A
24.4214 % IRR for project A
While
For Project B IRR is between 25% - 26 %
After trail and run method it is 25.9964 % - IRR for project B
And ranking basis IRR will be Rank- 1 - Project B
Rank - 2 Project A
Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake. IRR is uniform for investments of varying types and, as such, IRR can be used to rank multiple prospective projects on a relatively even basis. Assuming the costs of investment are equal among the various projects, the project with the highest IRR would probably be considered the best and be undertaken first.