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13 December, 14:14

Your division is considering two projects with the following cash flows (in millions) : 0 1 2 3 Project A - $20 $5 $9 $12 Project B - $13 $8 $7 $3 What are the projects' NPVs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.

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  1. 13 December, 17:44
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    The NPV for Project A is 3.291 and Project B is 3.56

    Explanation:

    In this question, we have to use the net present value formula which is shown below:

    Net present value = Present value of all years cash flows - Initial investment

    where,

    Present value of cash inflows is calculated by applying the discount rate which is presented below:

    For this, we have to first compute the present value factor which is computed by a formula

    = 1 : (1 + rate) ∧ number of year

    number of year = 0

    number of year = 1

    Number of year = 2

    number of year = 3

    So,

    Rate = 5%

    For year 1 = 0.9524 (1 : 1.05) ∧ 1

    For year 2 = 0.9070 (1 : 1.05) ∧ 2

    For year 3 = 0.8638 (1 : 1.05) ∧ 3

    Now, multiply this present value factor with yearly cash inflows

    So

    For Project A,

    The present value of year 1 = $5 * 0.9524 = $4.762

    The present value of year 2 = $9 * 0.9070 = $8.163

    The present value of year 3 = $12 * 0.8638 = $10.366

    and the sum of all year cash inflow is $23.291

    So, the Net present value would be equal to

    = $23.291 - $20 = 3.291

    And,

    For Project B

    The present value of year 1 = $8 * 0.9524 = $7.619

    The present value of year 2 = $7 * 0.9070 = $6.349

    The present value of year 3 = $3 * 0.8638 = $2.592

    and the sum of all year cash inflow is $16.560

    So, the Net present value would be equal to

    = $16.560 - $13 = 3.56

    Hence, the NPV for Project A is 3.291 and Project B is 3.56
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