Case Study FIN 534 Week 10

Topics: Net present value, Internal rate of return, Investment Pages: 3 (465 words) Published: November 2, 2014
Symone Reynolds
Homework -Week 10
Case Study
Your division is inconsideration for two investments, each of which requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and that the investments will produce the following after tax cash flows (in millions of dollars):

Year Project A
YearProject AProject B0 (25,000,000.00) PBP DPBP 15,000,00020,000,0001 5,000,000.00 (20,000,000.00)0.909 4,545,000.00 (20,455,000.00)1 210,000,00010,000,0002 10,000,000.00 (10,000,000.00) 2 Years 0.826 8,260,000.00 (12,195,000.00)2 315,000,0008,000,0003 15,000,000.00 5,000,000.00 8 Months 0.751 11,265,000.00 (930,000.00) 3 Years 420,000,0006,000,0004 20,000,000.00 0.683 13,660,000.00 12,730,000.00 1 Month

PV = 37,730,000.00
Calculate the following:From Computation Worksheet (Month/s are rounded up)Cost 25,000,000.00
Project AProject BNPV 12,730,000.00
Payback period2 Years and 8 Months1 Year and 6 Months Discounted Payback Period3 Years and 1 Month1 Year and 10 MonthsPI =PV/Cost=1.51 Net Present Value $12,730,000.00 $11,546,000.00 Profitability Index1.511.46

Internal Rate of return27.27%36.15%
Modified Internal Rate of return21.93%20.96%
YearProject B
0 (25,000,000.00) PBP DPBP
Project A (IRR)Rate10%1 20,000,000.00 (5,000,000.00) 1 Year 0.909 18,180,000.00 (6,820,000.00)1 Year YearDataDescription2 10,000,000.00 5,000,000.00 6 Months 0.826 8,260,000.00 1,440,000.00 10 Months 0 (25,000,000.00)Initial cost of a business3 8,000,000.00 13,000,000.00 0.751 6,008,000.00 7,448,000.00 1 5,000,000.00 Net income for the first year-80.00%4 6,000,000.00 0.683...
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