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Consider the following two mutually exclusive projects Year Cash FlowCash Flow 19,500 8,725 8,850 8,675 19,500 9,850 7,675 8,575 Calculate the IRR for each project. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) IRR Project X Project Y What is the crossover rate for these two projects? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Crossover rate What is the NPV of Projects X and Y at discount rates of 0%, 15%, and 25%? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) ect X Discount rate 096 15% 25%
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Question & Answer: Consider the following two mutually exclusive projects Year Cash FlowCash Flow 19,500 8,725 8,850 8,675 19,500 9,850 7,6…..
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| Answer 1. | ||||||
| The formula for IRR is: | ||||||
| 0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n | ||||||
| By Using the above formula, we caluclate IRR: | ||||||
| Year | Project X1 | Project X2 | ||||
| Intial Investment | 0 | (19,500) | (19,500) | |||
| Expcted Net Cash inflow | 1 | 8,725 | 9,850 | |||
| 2 | 8,850 | 7,675 | ||||
| 3 | 8,675 | 8,575 | ||||
| Internal Rate of Return | 16.49% | 16.61% | ||||
| Answer 2. | ||||||
| Year | Project X1 | Project X2 | Differnce | |||
| Intial Investment | 0 | (19,500) | (19,500) | – | ||
| Expcted Net Cash inflow | 1 | 8,725 | 9,850 | (1,125) | ||
| 2 | 8,850 | 7,675 | 1,175 | |||
| 3 | 8,675 | 8,575 | 100 | |||
| Crossover Rate | 12.36% | |||||
| Answer 3. | ||||||
| Calculation of NPV | ||||||
| Particulars | Year | 0% Factor | Project X1 | Project X2 | ||
| Cash Inflow | Present value | Cash Inflow | Present value | |||
| Cash Inflow | ||||||
| Net Cash Inflow | 1 | 1.00000 | 8,725.00 | 8,725.00 | 9,850.00 | 9,850.00 |
| 2 | 1.00000 | 8,850.00 | 8,850.00 | 7,675.00 | 7,675.00 | |
| 3 | 1.00000 | 8,675.00 | 8,675.00 | 8,575.00 | 8,575.00 | |
| A. Total Cash Inflow – PV | 26,250.00 | 26,100.00 | ||||
| Cash Outflow | ||||||
| Cost | 0 | 1 | 19,500.00 | 19,500.00 | 19,500 | 19,500 |
| B. Total Cash Outflow – PV | 19,500.00 | 19,500.00 | ||||
| NPV (A – B) | 6,750.00 | 6,600.00 | ||||
| Calculation of NPV | ||||||
| Particulars | Year | 15% Factor | Project X1 | Project X2 | ||
| Cash Inflow | Present value | Cash Inflow | Present value | |||
| Cash Inflow | ||||||
| Net Cash Inflow | 1 | 0.86957 | 8,725.00 | 7,587 | 9,850.00 | 8,565 |
| 2 | 0.75614 | 8,850.00 | 6,692 | 7,675.00 | 5,803 | |
| 3 | 0.65752 | 8,675.00 | 5,704 | 8,575.00 | 5,638 | |
| A. Total Cash Inflow – PV | 19,983 | 20,007 | ||||
| Cash Outflow | ||||||
| Cost | 0 | 1 | 19,500.00 | 19,500 | 19,500.00 | 19,500 |
| B. Total Cash Outflow – PV | 19,500 | 19,500 | ||||
| NPV (A – B) | 483 | 507 | ||||
| Calculation of NPV | ||||||
| Particulars | Year | 25% Factor | Project X1 | Project X2 | ||
| Cash Inflow | Present value | Cash Inflow | Present value | |||
| Cash Inflow | ||||||
| Net Cash Inflow | 1 | 0.80000 | 8,725.00 | 6,980 | 9,850.00 | 7,880 |
| 2 | 0.64000 | 8,850.00 | 5,664 | 7,675.00 | 4,912 | |
| 3 | 0.51200 | 8,675.00 | 4,442 | 8,575.00 | 4,390 | |
| A. Total Cash Inflow – PV | 17,086 | 17,182 | ||||
| Cash Outflow | ||||||
| Cost | 0 | 1 | 19,500.00 | 19,500 | 19,500.00 | 19,500 |
| B. Total Cash Outflow – PV | 19,500 | 19,500 | ||||
| NPV (A – B) | (2,414) | (2,318) | ||||
