Question
You are interning with the financial forecasting team of company A and you are tasked by the manager to evaluate two projects. You are given
You are interning with the financial forecasting team of company A and you are tasked by the manager to evaluate two projects. You are given the cashflows of the two projects as shown below:
a) Given the required rate of return of 5%, calculate the NPV of the respective projects. Round the result to 0 decimal place.
(b) Calculate the IRR for the respective projects using Excel. Round the result to one decimal place.
(c) After looking at your calculations in a) and b), your manager points out that you might have missed out one IRR figure for the Project 2 given that the cashflows are unconventional (i.e. the cashflows switch from being negative, to being positive, then to being negative again. Unconventional cashflows, having more than one switch in cashflow direction, can have more than one IRR). Find out if the Excel model indeed has an additional IRR. If it has, provide the result to 2 decimal places. Otherwise explain why there is no additional IRR. (Hint: Each IRR will result in the NPV to be 0.)
(d) Discuss if you would recommend the company to invest in Project 1 or Project 2. State the constraints and assumptions underlying your recommendation. Will the observation in c) affect your investment decision making?
\begin{tabular}{lrrrrrrrr} & & & \multicolumn{2}{l}{ Project 2 } \\ Year & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\ Cashflow & 100,000 & 100,000 & 240,000 & 240,000 & 100,000 & 45,000 & 100,000 \end{tabular}Step by Step Solution
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