Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Answer this with steps using an example provided Question EXAMPLE You are choosing between two projects. The cash flows for the projects are given in

Answer this with steps using an example provided

Question image text in transcribed

image text in transcribed

EXAMPLE

image text in transcribedimage text in transcribed You are choosing between two projects. The cash flows for the projects are given in the following table ( $ million): a. What are the IRRs of the two projects? b. If your discount rate is 4.7%, what are the NPVs of the two projects? c. Why do IRR and NPV rank the two projects differently? a. What are the IRRs of the two projects? The IRR for project A is %. (Round to one decimal place.) You are choosing between two projects. The cash flows for the projects are given in the following table ( $ million): a. What are the IRRs of the two projects? b. If your discount rate is 4.7%, what are the NPVs of the two projects? c. Why do IRR and NPV rank the two projects differently? Data table (Click on the following icon in order to copy its contents into a spreadsheet.) You are choosing between two projects. The cash flows for the projects are given in the following table (millions): a. What are the IRRs of the two projects? b. If your discount rate is 5.7% what are the NPVs of the two projects? c. Why do IRR and NPV rank the two projects differently? NPVA=$52million+(1+IRRA)1$28million+(1+IRRA)2$19million+(1+IRRA)3$23million+(1+IRRA)$18million Therefore, IRRA=27.0% To calculate the IRR for project B, use the following formula: NPVB=$97million+(1+IRRB)1$21million+(1+IRRB)2$43million+(1+IRRB)3$53million+(1+IRRB)$63million Therefore, IRRB=25.1% Using an Excel spreadsheet: The IRR for project A is 27.0% and the IRR for project B is 25.1%. You are choosing between two projects. The cash flows for the projects are given in the following table (millions): a. What are the IRRs of the two projects? b. If your discount rate is 5.7% what are the NPVs of the two projects? c. Why do IRR and NPV rank the two projects differently? where CF0 is the initial investment, CFt is the cash flow for period t,r is the discount rate, and n is the number of periods. To calculate the NPV for project A, use the following formula: NPVA=$52million+(1+0.057)1$28million+(1+0.057)2$19million+(1+0.057)3$23million+(1+0.057)4$18million=$2! If your discount rate is 5.7%, the NPV for project A is $25.39 million. To calculate the NPV for project B, use the following formula: NPVB=$97million+(1+0.057)1$21million+(1+0.057)2$43million+(1+0.057)3$53million+(1+0.057)4$63million=$5t If your discount rate is 5.7%, the NPV for project B is $56.71 million. The NPVs can be computed using an Excel spreadsheet: If your discount rate is 5.7%, the NPV for project A is $25.39 million and the NPV for project B is $56.71 million

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Financial Planning

Authors: Lawrence J. Gitman, Michael D. Joehnk, Randy Billingsley

12th Edition

1439044473, 978-1439044476

More Books

Students also viewed these Finance questions

Question

LO 1-5 What the basic criteria for effective messages are.

Answered: 1 week ago