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A company is considering two mutually exclusive projects that have the following cash flows: Year                       Project A Cash Flow                      Project...

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Finance

A company is considering two mutually exclusive projects thathave the following cash flows:

Year                      Project A CashFlow                     Project B Cash Flow

0                             -$10,000                                           -$8,000

1                                  1000                                              7000

2                                  2000                                              1000           

3                                  6000                                               1000

4                                  6000                                               1000

If the company’s required rate of return is 10%, find theproject’s NPV, IRR, PI, and payback period. Which project theyshould invest in?

Answer & Explanation Solved by verified expert
3.6 Ratings (429 Votes)
Firstly we will calculate the NPV of both projects Projects A NPV 10000 1000 1101 2000 1102 6000 1103 6000 1104 116795 Projects B NPV 8000 7000 1101 1000 1102 1000 1103 1000 1104 62441 In order to compute the IRR the NPV of the projects shall be equal to zero IRR of project A Lets calculate the project NPV by taking a hypotheticaly rate of 12 10000 1000 1121 2000 1122 6000 1123 6000 1124 57103 Now lets calculate the project NPV by taking a hypotheticaly rate of 15 10000 1000 1151 2000 1152 6000 1153 6000 1154 24253 Now we can see that the IRR shall be    See Answer
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Transcribed Image Text

A company is considering two mutually exclusive projects thathave the following cash flows:Year                      Project A CashFlow                     Project B Cash Flow0                             -$10,000                                           -$8,0001                                  1000                                              70002                                  2000                                              1000           3                                  6000                                               10004                                  6000                                               1000If the company’s required rate of return is 10%, find theproject’s NPV, IRR, PI, and payback period. Which project theyshould invest in?

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