BCT NPV and IRR Calculation Initial Investment Problem

User Generated

Obatvxbfv

Economics

Belgium Campus iTversity

Question Description

I’m working on a Finance exercise and need support.

OPQ Inc. considers investment in three mutually exclusive projects. Project A costs $120,000 in Year 0 and generates the free cash flow of $40 thousand per annum during the first three years, and $30 thousand in Years 4 and 5. Project B also costs $120,000 in Year 0 and generates the free cash flow of $30 thousand in Years 1 and 2, and $40 thousand in Years 3 through 5. Project C costs $200,000 in Year 0 and generates the free cash flow of $50 thousand in Years 1 and 2, and $80 thousand in Years 3 through 5. OPQ Inc. considers applying the 14% cost of capital as a discount rate for Projects A and B. Project C is riskier than Projects A and B. Therefore, OPQ Inc. management believes that they should apply the 17% cost of capital as a discount rate for Project C. What is the NPV and the IRR of each project? Which project should OPQ Inc. choose based on the NPV numbers? Which project should OPQ Inc. choose based on the IRR figures?

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Explanation & Answer

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Surname 1
Student’s Name
Course Name
Professor’s Name
Date
OPQ Inc. Problem solving
1. NPV and IRR calculation for each project
𝑪𝑭𝟏
𝑪𝑭𝟐
𝑪𝑭𝟑
𝑪𝑭𝒏
𝑵𝑷𝑽 = 𝑪𝑭𝟎 +
+
+
+

+
(𝟏 + 𝒓)𝟏 (𝟏 + 𝒓)𝟐 (𝟏 + 𝒓)𝟑
(𝟏 + 𝒓)𝒏
Whereby
CF0 = Initial inv...

onolfunn (799)
Rice University

Anonymous
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