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Homework answers / question archive / Vals Corporation has identified the following two mutually exlusive projects Year Cash Flow A Cash Flow B 0 -$35,000 -$35,000 1 $16,500 $18,000 2 $25,000 $23,200 3 $22,300 $25,000 4 $19,500 $19,200 a

Vals Corporation has identified the following two mutually exlusive projects Year Cash Flow A Cash Flow B 0 -$35,000 -$35,000 1 $16,500 $18,000 2 $25,000 $23,200 3 $22,300 $25,000 4 $19,500 $19,200 a

Finance

Vals Corporation has identified the following two mutually exlusive projects

Year Cash Flow A Cash Flow B
0 -$35,000 -$35,000
1 $16,500 $18,000
2 $25,000 $23,200
3 $22,300 $25,000
4 $19,500 $19,200

a. What is the IRR? Which project should be accept?

b. If the required return is 17%, what is the NPV of each project? Which project will the company choose is it applies the NPV decision rule?

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A)

Cash flows A

IRR= 17%+21695.04/(56695.04-33505)*(48-17)= 17%+0.94*29= 46%

Year Cash flows A Present value Factor@48% Present value-Cash flows
1 16,500                                     0.6757                             11,148.65
2 25,000                                     0.4565                             11,413.44
3 22,300                                     0.3085                               6,878.91
4 19,500                                     0.2084                               4,064.32
    Total Cash Flows 33,505
    Initial Investment -35,000
    Negative -1,495

Cash flows B

IRR= 17%+23187.87/(58187.87.04-34467)*(48-17)= 17%+0.98*31= 47.30%

Year Cash flows Present value Factor@48% Present value-Cash flows
1 18,000                                     0.6757                             12,162.16
2 23,200                                     0.4565                             10,591.67
3 25,000                                     0.3085                               7,711.78
4 19,200                                     0.2084                               4,001.79
    Total Cash Flows 34,467
    Initial Investment -35,000
    Negative -533

As per compare Project A, IRR is high in project B. So project B is selected.

Note : See the below analysis, here initial investment is low but returns is high. So project B is suitable.

Year Avg cash flows Avg cash flows
1 16,500 18,000
2 25,000 23,200
3 22,300 25,000
4 19,500 19,200
Total 83,300 85,400
Avg cash flow 20825 21350
Factor for the project/Fake Pay Back Period                    1.68                    1.64
Disc factor 12% 14%

B) Yes, Cash Flow B project is selected due to NPV is high as compared with Cashflow A project.

Year Cash flows Present value Factor@17% Present value-Cash flows   Year Cash flows Present value Factor@17% Present value-Cash flows
1 16,500                              0.8547                       14,102.56   1 18,000                                     0.8547                       15,384.62
2 25,000                              0.7305                       18,262.84   2 23,200                                     0.7305                       16,947.91
3 22,300                              0.6244                       13,923.46   3 25,000                                     0.6244                       15,609.26
4 19,500                              0.5337                       10,406.18   4 19,200                                     0.5337                       10,246.08
    Total Cash Flows                            56,695.04       Total Cash Flows                            58,187.87
    Initial Investment -35,000       Initial Investment -35,000
    NPV                            21,695.04       NPV                            23,187.87
    Rank II       Rank I

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