Question
1) Using a cost of capital of 16%, calculate the net present value for the project shown in the following table and indicate whether it
1)Using a cost of capital of 16%, calculate the net present value for the project shown in the following table and indicate whether it is acceptable,
| Initial investment (CF0) | -1,150,000 |
|
| Year (t) | Cash inflows (CFt) | |
| 1 | $80,000 |
|
| 2 | $140,000 |
|
| 3 | $188,000 |
|
| 4 | $251,000 |
|
| 5 | $320,000 |
|
| 6 | $385,000 |
|
| 7 | $272,000 |
|
| 8 | $102,000 |
|
| 9 | $49,000 |
|
| 10 | $26,000 |
|
2) Nile Inc. wants to choose the better of two mutually exclusive projects that expand warehouse capacity. The projects' cash flows are shown in the following table:
| Project X | Project Y | |||
| Initial investment (CF0) | $500,000 |
| $330,000 |
|
| Year (t) | Cash inflows (CFt) | |||
| 1 | $120,000 |
| $150,000 |
|
| 2 | $150,000 |
| $140,000 |
|
| 3 | $160,000 |
| $75,000 |
|
| 4 | $190,000 |
| $50,000 |
|
| 5 | $250,000 |
| $70,000 |
|
. The cost of capital is 18%.
a.Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs.
b.Which project is preferred?
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