Net Present Value and Project

Topics: Net present value, Cash flow, Internal rate of return Pages: 4 (921 words) Published: January 10, 2011
As Caledonia is considering two additional mutually exclusive projects, for Week’s four assignment, Team D will formulate answers to determine what between Project A and Project B each project’s payback period, net present value, and internal rate of return. In addition, the team will give an analysis of what caused the ranking conflict and which project should be accepted and why. With a final comment, the team will describe factors Caledonia must consider if they were doing a lease versus buy. Cash flows associated with these projects

RRR = 11%
YearPROJECT APROJECT B11%
0($100,000)($100,000)
132,000
232,0000
332,0000
432,0000
532,000$200,000

NPV $18,269$18,690

Required rate of return on these projects is 11 percent
a.What is each project’s payback period?

YearProject AProject BPresent Value (PV) @ 11%Project AProject B 0-100,000-100,0001-100000-100,000
132,00000.90288280
232,00000.81259710
332,00000.73233980
432,00000.66210790
532,000200,0000.5918990118690

Project a 100000/32,000=3.125 years
Project b 100,000/200,000=0.5 There was no cash flow for the first 4 years 4+0.5=4.5 years Project A’s payback period is 3.125 years whereas Project B is 4.5 years. b.What is each project’s net present value?

The NPV for Project A is $18,269, whereas the NPV for Project B is $18,690 c.What is each projects internal rate of return?
Project A 100,000 +
IRR = 18.03%
Project B – 100,000 + 200,000
IRR = 14.87%
d.What has caused the ranking conflict?
The ranging conflict comes from the timeline of the two projects. Over the course of five years project B will make more money than project A. However, project A will begin seeing payback on the investment much faster than project B. Allowing the organization

to begin seeing a return on their money sooner allows the organization to invest in other
areas and...

References: Keown J, Martin, Pretty J, and Scott D. (2005) Financial Management: Principles and
Applications, Tenth Edition Published by Pearson Education Company,
Retrieved on January 8, 2011 from University of Phoenix FIN/370 https://ecampus.phoenix.edu/content/eBookLibrary2/content/eReader.aspx
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