Use the following information to answer the next three questions. You are evalua
ID: 2733369 • Letter: U
Question
Use the following information to answer the next three questions.
You are evaluating two mutually exclusive projects, A and B. Project A has an initial outlay of 389,000 and is expected to produce cash flows of 242,000 in year one and 294,000 in year 2. Project B has an initial outflow of 199,000 and is expected to generate 131,500 in year one and 172,500 two years from today. The opportunity cost of capital for each project is 8%.
1) Find Project A's internal rate of return.
.1855
.3283
.2344
.1987
2) Find the net present value of Project B. Round your final answer to two decimals.
3) Which project(s) should you choose based on NPV?
A
B
A&B
You'd be indifferent between the two.
.1855
.3283
.2344
.1987
Explanation / Answer
Calculation of the IRR of Project A NPV at 8% NPV = Present Value of Cash Inflows- Cash Outflows NPV = 242000/(1.08)^1+294000/(1.08)^2-389000 242000*.926+294000*.857-389000 224074.07+252057.61-389000 $87,131.69 NPV at 25% NPV = 242000/(1.25)^1+294000/(1.25)^2-389000 242000*.8+294000*.64-389000 193600+188160-389000 ($7,240) IRR = Lower Rate+ NPV at Lower Rate/ NPV at Lower Rate+ NPV at Higher ( Higher Rate- Lower Rate) 8+87131.69/87131.69+7240( 25-08) 8+.923*17 8+15.44 0.2344 The IRR is 23.44% The correct answer is C. .2344 Calculation of the NPV of project B NPV at 8% NPV = Present Value of Cash Inflows- Cash Outflows NPV = 131500/(1.08)^1+172500/(1.08)^2-199000 131500*.926+172500*.857-199000 121759.26+147890.95-199000 $70,650.20 On the basis of NPV the Project A hould be choosen as it is having higher NPV