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stephens inc is considering investing in one of two mutually exclusive 4 year projects. project a requires equipment with a cost of $140000 and increases net income by $5000, $10000, $20000, $30000 in years 1-4. Project b required equipment cost of $200000 and increases cash flow by $70000 per year in years 1-4. both projects have a 4 year life with straight line depreciation.

1) what is the NPV of project A at a discount rate of 10%? the professor says it's $19,272 but on a ba ii plus im getting -91,673. what am i doing wrong? he's not clear on the explanation, he did a timeline and listed cashflows, but added 35000 to all the positive cash flows. please help with explanations in detail. thank you.

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Deanna Hettinger
Deanna HettingerLv2
28 Sep 2019

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Use the following information for problems 1 through 5 I am considering two mutually exclusive 3yearr projects. Project A requires an investment in equipment of $120,000 and will produce net income of $20,000 per year. Project B requires an investment in equipment of $90,000 and produces net income of $16,000 per year. Each project is 3 years and requires a $5,000 investment in inventory. The firm uses straight-line depreciation and depreciates all assets to zero. The discount rate is 12%. Ignore taxes.

2) if the NPV of project B? (i assume he means what is?) the correct answer is $19,043 but i am not getting it, and i noticed someone who previously answered also got it wrong.

3) what is the IRR of project B? the correct answer is 23.14%

4) at what discount rate would i be indifferent to the two projects? the correct answer is 18.91%

5) what is the profitability index of project A? answer 1.18

please show steps and formulas, im using a ba ii plus

thank you!


Atlas Corp. is considering two mutually exclusive projects. Bothrequire an initial investment of $10,000 at t = 0. Project S has anexpected life of 2 years with after-tax cash inflows of $6,000 and$8,000 at the end of Years 1 and 2, respectively. Project L has anexpected life of 4 years with after-tax cash inflows of $4,373 atthe end of each of the next 4 years. Each project has a WACC of10.75%, and Project S can be repeated with no changes in its cashflows. The controller prefers Project S, but the CFO prefersProject L. How much value will the firm gain or lose if Project Lis selected over Project S, i.e., what is the value of NPVL -NPVS?

Answer
a)$127.64
b)$118.19
c)$132.37
d)$107.55
e)$95.73

*Please show how to derive answer, thanks!

Your company Portfolio Manager is convening a review board in the first calendar quarter to consider three projects. You have been asked to provide recommendations with respect to the capital budgeting aspects of these projects. Your recommendations will be considered by the review board along with other non-financial aspects of the projects. Initial (year 0) funding will be provided in the current year for the single project selected.

Project sponsors have provided the following estimated cash flow projections:

Project A

Project B

Project C

Year

Outflow

Inflow

Netflow

Outflow

Inflow

Netflow

Outflow

Inflow

Netflow

0

15000

-150000

15000

-150000

20000

-200000

1

20000

20000

130000

40000

-9000

150000

-150000

2

30000

30000

50000

50000

90000

90000

3

40000

40000

60000

60000

100000

100000

4

40000

40000

90000

90000

110000

110000

5

50000

50000

90000

90000

120000

120000

The company has not yet decided how the selected project will be financed. The cost of capital or hurdle rate will vary depending upon how the company decides to finance the project. You decide to compare projects in three areas: (1) payback period (not considering the cost of capital); NPV sensitivity (see note 1 below); and (3) Internal Rate of Return (IRR). Conduct each analysis and interpret the results.

Based on your analysis, which project would you recommend and why? Your recommendation must be based on the combination of all three factors.

Show all calculations supporting your recommendation. Calculate NPV to the nearest dollar, IRR to three decimal places, and payback period to one decimal place.

Note 1: Project NPV varies inversely with the cost of funds to perform the project (expressed as the hurdle rate or k in the NPV discount factor formula). Some project NPVs are more sensitive to changes in k than others. See the NPV Profile discussion in Gallagher, Chapter 10, pages 278-279 for information on determining NPV sensitivity.

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