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A firm has a capital budget of $100 which must be spent on 1 pf 2...

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Question

Finance

A firm has a capital budget of $100 which must be spent on 1 pf2 projects, each requiring a present outlay of $100. Project Ayields a return of $120 after 1 year, whereas Project B yields$201.14 after 5 years.

Calculate

  1. The NPV of each project using 10% discount rate
  2. The IRR of each project

What are the project rankings on the basis of these twoinvestment decision rules? Supposed that you are told that thefirms reinvestment rate 12% which project should the firmschoose?

Answer & Explanation Solved by verified expert
4.4 Ratings (933 Votes)
Calculation of NPV Using discount rater10 Year Cash flowA Cash FlowB PV factor11rn Discounted CF A Discounted CF B 0 100 100 1 100 100 1 120 0909090909 1090909091 0 2 0826446281 0 0 3 0751314801 0 0 4 0683013455 0 0 5 20114 0620921323 0 1248921149 NPV 9090909091    See Answer
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Transcribed Image Text

A firm has a capital budget of $100 which must be spent on 1 pf2 projects, each requiring a present outlay of $100. Project Ayields a return of $120 after 1 year, whereas Project B yields$201.14 after 5 years.CalculateThe NPV of each project using 10% discount rateThe IRR of each projectWhat are the project rankings on the basis of these twoinvestment decision rules? Supposed that you are told that thefirms reinvestment rate 12% which project should the firmschoose?

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