All techniques with NPV profile-Mutually exclusive projects Projects A and B, of
ID: 2619370 • Letter: A
Question
All techniques with NPV profile-Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table. a. Calculate each project's payback period b. Calculate the net present value (NPV) for each project. c. Calculate the internal rate of return (IRR) for each project. d. Indicate which project you would recommend. a. The payback period of project A is years. (Round to two decimal places.)Explanation / Answer
Project A:
Payback = 3 + (200,000 - 165,000)/65,000 = 3.54
NPV = 6,762.78
IRR = 14.30%
Project B:
Payback = 3 + 10,000/50,000 = 3.20 years
NPV = 15,861.56
IRR = 16.99%
Select Project B
Discount rate 13.0000% Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow (200,000.00) 0 (200,000.00) (200,000.00) 50,000.000 1 44,247.79 (155,752.21) 55,000.000 2 43,073.07 (112,679.14) 60,000.000 3 41,583.01 (71,096.14) 65,000.000 4 39,865.72 (31,230.42) 70,000.000 5 37,993.20 6,762.78