Problem 1 The financial analyst team of XYZ Co. is trying to evaluate two projects with the following cash flows: Year Project A Project B 0 -20,000 -10,000 1 -10,000 -3.000 2 2.000 -1.000 3 4.000 1.000 6,500 3.500 5 9,000 4,000 10,000 4,500 7 10.000 4,500 8 10.000 4,000 9 8,000 3,500 10 6,000 2,500 Cash flows at times 0 and 1 represent costs of initiating the projects, and cash flows at times 2 through 10 represent forecasted operating cash flows. (This information is just for context and requires no special accommodation.) XYZ Co. does not plan to raise additional financing for taking new projects. XYZ's cost of capital is 6% for both projects. Assume that the 2 projects are independent in Parts A-D. Do not use Excel functions, except for Part C. Compute PV's mathematically in your spreadsheet model. Part A: What are the NPVs of Project A and Project B? Based on your calculation, should XYZ Co take Project A or Project B or Both? Part B: What are the Profitability Indices of Project A and Project B? Based on your calculation, should XYZ Co. take Project A or Project B or Both? Part C: What are the IRR of Project A and Project B? Based on your calculation should XYZ Co take Project A or Project B or Both? You may use "=irr(cell range)" where cell range refers to the sequence of cells that list the project cash flows. Part D: What are the Payback periods for Projects A and B. If the projects are independent, cash flows are spread evenly throughout the year, and the cut-off i3 6.0 years, should you take on projects A and B? If instead we assume end of year cash flows for years 1-10, what does this do to your payback calculations and decisions? Part E: Suppose that Project A and Project B are mutually exclusive. Based on NPVs you calculated in Part A, which project should XYZ Co. take? Based on IRRs you calculated in Part C, which project should XYZ Co. take? Are they giving consistent suggestions? If they are not consistent, why such inconsistency exists? Problem 1 The financial analyst team of XYZ Co. is trying to evaluate two projects with the following cash flows: Year Project A Project B 0 -20,000 -10,000 1 -10,000 -3.000 2 2.000 -1.000 3 4.000 1.000 6,500 3.500 5 9,000 4,000 10,000 4,500 7 10.000 4,500 8 10.000 4,000 9 8,000 3,500 10 6,000 2,500 Cash flows at times 0 and 1 represent costs of initiating the projects, and cash flows at times 2 through 10 represent forecasted operating cash flows. (This information is just for context and requires no special accommodation.) XYZ Co. does not plan to raise additional financing for taking new projects. XYZ's cost of capital is 6% for both projects. Assume that the 2 projects are independent in Parts A-D. Do not use Excel functions, except for Part C. Compute PV's mathematically in your spreadsheet model. Part A: What are the NPVs of Project A and Project B? Based on your calculation, should XYZ Co take Project A or Project B or Both? Part B: What are the Profitability Indices of Project A and Project B? Based on your calculation, should XYZ Co. take Project A or Project B or Both? Part C: What are the IRR of Project A and Project B? Based on your calculation should XYZ Co take Project A or Project B or Both? You may use "=irr(cell range)" where cell range refers to the sequence of cells that list the project cash flows. Part D: What are the Payback periods for Projects A and B. If the projects are independent, cash flows are spread evenly throughout the year, and the cut-off i3 6.0 years, should you take on projects A and B? If instead we assume end of year cash flows for years 1-10, what does this do to your payback calculations and decisions? Part E: Suppose that Project A and Project B are mutually exclusive. Based on NPVs you calculated in Part A, which project should XYZ Co. take? Based on IRRs you calculated in Part C, which project should XYZ Co. take? Are they giving consistent suggestions? If they are not consistent, why such inconsistency exists
