Corporate Finance - Corporate Finance Section 1
41. Two mutually exclusive projects have the following cash flows ($) and internal rates of return
| Project | IRR | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 |
| X | 26.36% | -2,340 | 240 | 729 | 505 | 3,680 |
| Y | 26.68% | -2,340 | 240 | 729 | 990 | 3,115 |
Assuming a discount rate of 10% annually for both projects, the firm
should most likely accept:
should most likely accept:
- Option : B
- Explanation : Compute the NPV of both the projects at 10% discount rate. Using the financial calculator, enter CF for Years 0 – 4. Project X: CF0 = -2340, CF1 = 240, CF2 = 729, CF3 = 505, CF4 = 3680, I = 10, CPT NPV. NPV = $1,373.56. Project Y: CF0 = -2340, CF1 = 240, CF2 = 729, CF3 = 990, CF4 = 3115, I = 10, CPT NPV. NPV = $1,352.05. B is correct because Project X has a higher NPV and the projects are mutually exclusive, only Project X should be accepted.
43. Consider the following two mutually exclusive projects:
| Project | Year 0 | Year 1 | Year 2 | Year 3 |
| Project A | - 3518 | 2500 | 1450 | 500 |
| Project B | - 3846 | 900 | 1500 | 2500 |
At an annual discount rate of 10% for both projects, the firm should most
likely accept:
likely accept:
- Option : A
- Explanation : Plug in the relevant cash flows into the financial calculator for both the projects and compute the NPVs. Project A: CF0 = -3518, CF1 = 2500, CF2 = 1450, CF3 = 500, I = 10%, CPT NPV NPVA = $328.73 Project B: CF0 = -3846, CF1 = 900, CF2 = 1500, CF3 = 2500, I = 10%, CPT NPV NPVB = $90.14 Since both projects are mutually exclusive i.e. the firm can only accept one, it would choose the one with the higher NPV which is A.
| Cash Flows | ||||||||
| Year | 0 | 1 | 2 | 3 | 4 | NPV | IRR (%) | |
| Project A | -100 | 0 | 0 | 0 | 200 | 24.20 | 18.92 | |
| Project B | -100 | 40 | 40 | 40 | 40 | 19.19 | 21.86 | |
The appropriate investment decision in this case is to:
- Option : B
- Explanation : When valuing mutually exclusive projects, the decision should be made with the NPV method because this method uses the most realistic discount rate, namely the opportunity cost of funds. In the example, the reinvestment rate for the NPV project (here 12 percent) is more realistic than the reinvestment rate for the IRR method (here 18.92 percent or 21.86 percent).
45. A project has the following cash flows (£):
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 |
| –3,250 | 1,505 | 550 | 955 | 1,820 |
Assuming a discount rate of 7% annually, the discounted payback period
(in years) is closest to:
(in years) is closest to:
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