Question

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.

Answer 1

Answer:

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