Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
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. 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?
Expert Solution
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 |
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
