Capital Budgeting Answer
Problem
Calculate the PP, NPV, and IRR of the following projects assuming a 14% Discount Rate.
Cash Flow | Project A | Project B | Project C | Project D |
Year 0 | -$1,000,000 | -$1,000,000 | -$500,000 | -$500,000 |
Year 1 | $400,000 | $150,000 | $200,000 | $75,000 |
Year 2 | $400,000 | $100,000 | $250,000 | $50,000 |
Year 3 | $225,000 | $550,000 | $150,000 | $225,000 |
Year 4 | $200,000 | $775,000 | $100,000 | $387,500 |
Which project(s) should we accept if they are independent? Mutually Exclusive?
Calculations:
Internal Rate Of Return
IRR-A = 9.99%
IRR-B = 15.40%
IRR-C = 17.07%
IRR-D = 12.94%
Net Present Value
NPV-A = ($71,051)
NPV-B = $38,622
NPV-C = $28,259
NPV-D = ($14,437)
Answer:
If Independent
Choose Projects B and C as both have positive NPVs.
If Mutually Exclusive
Choose Project B as it has the highest NPV. The higher IRR for project C is irrelevant and is caused by the different sizes of the projects. Again, when there are conflicts among the rules always follow NPV.