Net Present value

$10.00

Description

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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