Question
Your division is considering two investment projects, each of which requires an up-front expenditure of $23 million. You estimate that the investments will produce the
- Your division is considering two investment projects, each of which requires an up-front expenditure of $23 million. You estimate that the investments will produce the following net cash flows:
| Year | Project A | Project B |
| 1 | $ 6,000,000 | $20,000,000 |
| 2 | 10,000,000 | 10,000,000 |
| 3 | 20,000,000 | 8,000,000 |
a. What are the two projects' net present values, assuming the cost of capital is 5%? Round your answers to the nearest dollar. Project A $ Project B $ What are the two projects' net present values, assuming the cost of capital is 10%? Round your answers to the nearest dollar. Project A $ Project B $ What are the two projects' net present values, assuming the cost of capital is 15%? Round your answers to the nearest dollar. Project A $ Project B $
b. What are the two projects' IRRs at these same costs of capital? Round your answers to two decimal places. Project A % Project B %
2.Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $23,000, whereas the gas-powered truck will cost $17,100. The cost of capital that applies to both investments is 11%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,500 per year and those for the gas-powered truck will be $4,950 per year. Annual net cash flows include depreciation expenses.
a. Calculate the NPV for each type of truck. Round your answers to the nearest dollar.
| Electric-powered truck | $ |
| Gas-powered truck | $ |
b. Calculate the IRR for each type of truck. Round your answers to two decimal places.
| Electric-powered truck | % |
| Gas-powered truck | % |
3.Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below:
| Year | X | Y | ||
| 0 | -$5,000 | -$5,000 | ||
| 1 | 1000 | 4,500 | ||
| 2 | 1500 | 1500 | ||
| 3 | 2000 | 1000 | ||
| 4 | 4000 | 500 | ||
The projects are equally risky, and their cost of capital is 15%. You must make a recommendation, and you must base it on the modified IRR (MIRR). Calculate the two projects' MIRRs. Round your answers to two decimal places. Project X % Project Y %
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Global Corporate Finance A Focused Approach
Authors: Suk Hi Kim, Kenneth A Kim
2nd Edition
9814618004, 9789814618007
