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9:11 Chapter 5. Problem 1 < C. LTE chegg.com Circumstances that should support the acceptance of Project A: The IRR of the Project A
9:11 Chapter 5. Problem 1 < C. LTE chegg.com Circumstances that should support the acceptance of Project A: The IRR of the Project A is higher, and it will retum more than the initial investment in only 2-years. Thus, firm will be able to realize its investment from Project A in period lesser than Project B. Also, the company should accept the Project A if the discount rate is greater than 10.7% (IRR of incremental investment) and lesser than 13.1% (IRR of Project A). Comment Step 9 12 A d. Calculate incremental investment (B-A): The incremental investment is the difference between the net present value of the Project A and the net present value of the Project B calculated as below: Compute the NPV of incremental investment at 0% discount rate as follows: D Your 2 Project A Project 3 A B c D Project (-A) Project-A) E-(D-C) 1-(-D) 4 1.000000 -100 -100 8.0000 S 1000000 60 40 600000 6 2 1.000000 60 7 3 1.000000 140 1400000 Not P Vale-SUM 20000 Thus, the NPV is 5000, Comment Step 10 of 12 Compute the NPV of incremental investment at 10% discount rate as follows: D Inment Present val Cashflow Project A Project B Project (B-A) Project (B-A) D E-(D-C) F-(BE) Presenta You Each 10% A B C 0 0909091 3 0.826446 60 3 0.751315 0 Thus, the Ne -100 140 8.0000 -545455 40 140 Nat PV-SM >>> 1052
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