Top Education Institute TFIN202 Corporate Finance Top Education Institute Sydney
ID: 2817669 • Letter: T
Question
Top Education Institute TFIN202 Corporate Finance Top Education Institute Sydney City School of Business Case Study #4 (30 marks) Trident Ltd is evaluating two independent projects. The costs and expected cash flows are given in the following table. The company's cost of capital is 10 per cent. Year $312 500 $395 000 121 450 121 450 121 450 121 450 121 450 153 552 158 711 166 220 132 000 122 000 4 A. Calculate the project's NPV. (8 marks) B. Calculate the project's IRR. (16 marks) C. What is the decision based on NPV? What is the decision based on IRR? Is there a conflict? (4 marks) D. If you are the decision maker for the company, which project or projects will be accepted? Explain your reasoning. (2 marks).Explanation / Answer
Answer A Calculation of NPV of Project Year Discount factor @ 10% Project A Project B Cash flow Present Value Cash flow Present Value 0 1 -$312,500.00 -$312,500.00 -$395,000.00 -$395,000.00 1 0.909090909 $121,450.00 $110,409.09 $153,552.00 $139,592.73 2 0.826446281 $121,450.00 $100,371.90 $158,711.00 $131,166.12 3 0.751314801 $121,450.00 $91,247.18 $166,220.00 $124,883.55 4 0.683013455 $121,450.00 $82,951.98 $132,000.00 $90,157.78 5 0.620921323 $121,450.00 $75,410.89 $122,000.00 $75,752.40 NPV $147,891.05 $166,552.57 NPV of Project A $147,891.05 NPV of Project B $166,552.57 Answer B Calculation of IRR of projects Year Project A Project B Cash flow Cash Flow 0 -$312,500.00 -$395,000.00 1 $121,450.00 $153,552.00 2 $121,450.00 $158,711.00 3 $121,450.00 $166,220.00 4 $121,450.00 $132,000.00 5 $121,450.00 $122,000.00 IRR of Project A 27.19% IRR of Project B 26.09% Answer C Decision based on NPV Select Project B as it has higher NPV. Decision based on IRR Select both the projects as both have a IRR greater than cost of capital. Yes , there is a conflict as NPV criteria says select Project B and IRR Criteria says select both. Answer D If I am the decision maker , I will select Project B as it has higher NPV.