Part 2 Problem Solving This portion of the exam should be done on worksheet give
ID: 2805168 • Letter: P
Question
Part 2 Problem Solving This portion of the exam should be done on worksheet given. Show eac h step clearly. Where re- ired, show formulae and calculator inputs. No partial credit will be given otherwise. Problem # 1 30 points After the problem has been set up, the calculator should be used to compute NPV and IRR. Show calculator inputs. Chunky Monkey Ice Cream has a 12% cost of capital, and has generated the following information on two mutu- ally exclusive projects. Project A will require an investment of $100,000 while the initial outlay for Project B is 2 ½ times greater Year Proiect A Proiect B 30,000 0,000 30,000 30,000 50,000 75,000 75,000 75,000 75,000 100,000 4 a. Compute the payback of both projects. b. Compute the NPV of both projects c. Compute the IRR of both projects. d. Which project should Chunky Monkey adopt? Why? 5 points 10 points 10 points 5 points Page 5 of 7Explanation / Answer
a) Payback period is the no. of years it takes to recover investment.
In both cases, Payback = 3.33 years
b) NPV can be calculated using NPV function on a calculator or excel.
NPV = NPV(12%, 30000...50000) - 100000 = $19,491.82 for A
NPV = NPV(12%, 75000...100000) - 250000 = $35,543.89 for B
c) IRR can be calculated using IRR function in excel or calculator
For A, IRR = 19.05% and for B, IRR = 17.23%
d) Project B should be selected as it has higher NPV.
A B 0 -100000 -250000 1 30000 75000 2 30000 75000 3 30000 75000 4 30000 75000 5 50000 100000 Payback 3.33 3.33 NPV $19,491.82 $34,543.89 IRR 19.05% 17.23%