A) Compute the IRR statistic for projec tA and note whether the firm should acce
ID: 2741904 • Letter: A
Question
A) Compute the IRR statistic for projec tA and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12%.
Project A
Time
0
1
2
3
4
Cash Flow
-$9,000
$3,350
$4,180
$1,520
$2,000
B) Compute the payback statistic for Project B and recommend whether the firm should accept or reject the project with the cash flows, shown below if the appropriate cost of capital is 8% and the maximum allowable payback is four years.
Project B
Time
0
1
2
3
4
5
Cash Flow
-$1,000
$350
$480
$520
$300
$100
C) Compute the NPV statistic for Project C and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent.
Project C
Time
0
1
2
3
4
Cash Flow
-$9,000
$3,500
$4,300
$1,550
$900
D) Compute the NPV statistic for Project D and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 8%.
Project D
Time
0
1
2
3
4
5
Cash Flow
-$10,000
$5,000
$-6,00 0
$6,000
$7,000
$10,000
E) Compute the MIRR statistic for Project E and tell whether to accept or reject the project with the cash flows shown below if the appropriate cost of capital is 13%.
Project E
Time
0
1
2
3
4
Cash Flow
-$4,750
$5,330
-$4,180
$1,520
$2,000
F) Compute the discounted payback statistic for Project F and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10% and the maximum allowable discounted payback is four years.
Project F
Time
0
1
2
3
4
5
Cash Flow
-$8,000
$3,350
$4,180
$1,520
$0
$1,000
Time
0
1
2
3
4
Cash Flow
-$9,000
$3,350
$4,180
$1,520
$2,000
Explanation / Answer
1.
NPV = c1/(1+y)1 + c2/(1+y)2 + ……+ cn/(1+y)n + 1000/(1+y)n
IRR is the rate at which NPV is zero.
comput y value using goal seek function in excel.
IRR = 10.047%, which is less than cost of capital (12%). Hence reject the project.
2.
Year
Cashflow (x)
Cummulative cashflow
0
-1000
-1000
1
350
-650
2
480
-170
3
520
350
4
300
650
5
100
750
Cumulative cash flow will switch from negative to positive between 2nd and 3rd years.
Payback = 2+170/520 = 2.3269 years.
3.
NPV is negative, so the project should be rejected.
4.
NPV is negative, so the project should be rejected.
Rate 0.10046881 Year Cashflow (x) Discount rate = 1/(1+0.09)^n Present Value 0 -9000 1 -9000 1 3350 0.90870363 3044.157152 2 4180 0.82574228 3451.602742 3 1520 0.75035501 1140.539612 4 2000 0.68185032 1363.700635 NPV 0.000141432