Net Present value



It’s time to decide how to use the money your firm is expected to make this year. Two investment opportunities are available, with net cash flows as follows:

Year Project X Project Y
0 (Now) ($30,000) ($30,000)
1 11,000 4,000
2 10,000 8,000
3 9,000 12,000
4 8,000 16,000

a. Calculate each project’s Net Present Value (NPV), assuming your firm’s weighted average cost of capital (WACC) is 6%

b. Calculate each project’s Internal rate of Return (IRR).

c. Plot NPV profiles for both projects on a graph).

d. Assuming that your firm’s WACC is 6%:

(1) If the projects are independent which one(s) should be accepted?
(2) If the projects are mutually exclusive which one(s) should be accepted?


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