Project A: Question 1 Answer
Project A: Question 1 Answer
Project A: Question 1 Answer
Project A
Project B
NPV for Project B @12+2%= 14% (by adding 2% in discount rate) = -$14,489.68
At discount rate 10% both project A & b is feasible having a positive value
Overall, the project both project is having positive value @ 10%. If the project discount rate is
10% company can accept both project with positive NPV value . However, if the discount rate is
14% or 12% company should accept the project A with a positive NPV value.
Question 2
Will Jill need any outside capital if she pays no dividends and, if yes, how much
Working Capital
Detailed solution
a. Calculate each franchise's payback period, net present value (NPV), internal rate of return (IRR), and
modified internal rate of return (MIRR).
Solution
Franchise S Franchise L
$60.11 $15.03
Net Present Value $18.78 $19.98
@ 10%
Project S has more NPV value than Project L so we should
accept project S
Pay back Period Payback period = 1+$30/$50 which is
2+$30/$80 1+0.6000 = 1.6
=2+0.375 which Years
=2.375 years
Graph the NPV of each franchise at different values of the corporate cost of capital from 0 to 24 percent
in 2 percent increments. - How sensitive are the franchise NPVs to the corporate cost of capital? - Why
do the franchise NPVs differ in their sensitivity to the corporate cost of capital? - At what cost of capital
does each franchise intersect the X-axis? What are these values?
50
40
30
20 COC
NPV-L
10 NPV-s
0
2 4 6 8 10 12 14 16 18 20 22 24
-10
-20
Project S
Year Cash Flow pvif@2% PV@2% pvif@4% PV@4% pvif@6% PV@6% pvif@8% PV@8%
0 -100 1.0000 -100 1.0000 -100 1.0000 -100 1.0000 -100
1 70 0.9804 69 0.9615 67 0.9434 66 0.9259 65
2 50 0.9612 48 0.9246 46 0.89 44 0.8573 43
3 20 0.9423 19 0.889 18 0.8396 17 0.7938 16
NPV 36 31 27 24
Year Cash Flow pvif@10% PV@10% pvif@12% PV@12% pvif@14% PV@14% pvif@16$ PV@16%
0 -100 1.0000 -100 1.0000 -100 1.0000 -100 1.0000 -100
1 70 0.9091 64 0.8929 63 0.8772 61 0.8621 60
2 50 0.8264 41 0.7972 40 0.7695 38 0.7432 37
3 20 0.7513 15 0.7118 14 0.675 13 0.6407 13
NPV 20 17 13 10
Year Cash Flow pvif@18% PV@18% pvif@20% PV@20% pvif@22% PV@22% pvif@24% PV@20%
0 -100 1.0000 -100 1.0000 -100 1.0000 -100 1.0000 -100
1 70 0.8475 59 0.8333 58 0.8197 57 0.8065 56
2 50 0.7182 36 0.6944 35 0.6719 34 0.6504 33
3 20 0.6086 12 0.5787 12 0.5507 11 0.5245 10
NPV 7 6 2 -1
Project L:
Year Cash Flow pvif@2% PV@2% pvif@4% PV@4% pvif@6% PV@6% pvif@8% PV@8%
0 -100 1.0000 -100 1.0000 -100 1.0000 -100 1.0000 -100
1 10 0.9804 10 0.9615 10 0.9434 9 0.9259
2 60 0.9612 58 0.9246 55 0.89 53 0.8573 9
3 80 0.9423 75 0.889 71 0.8396 67 0.7938 51
NPV 43 36 30 64
Year Cash Flow pvif@10% PV@10% pvif@12% PV@12% pvif@14% PV@14% pvif@16$ PV@16%
0 -100 1.0000 -100 1.0000 -100 1.0000 -100 1.0000 -100
1 10 0.9091 9 0.8929 9 0.8772 9 0.8621 9
2 60 0.8264 50 0.7972 48 0.7695 46 0.7432 45
3 80 0.7513 60 0.7118 57 0.675 54 0.6407 51
NPV 19 14 9 4
Year Cash Flow pvif@18% 24 pvif@20% PV@20% pvif@22% PV@22% pvif@24% PV@20%
0 -100 1.0000 -100 1.0000 -100 1.0000 -100 1.0000 -100
1 10 0.8475 8 0.8333 8 0.8197 8 0.8065 8
2 60 0.7182 43 0.6944 42 0.6719 40 0.6504 39
3 80 0.6086 49 0.5787 46 0.5507 44 0.5245 42
NPV 0 -4 -7 -11
b. Which project or projects should be accepted if they are independent? Which project should be accepted if they
are mutually exclusive?
Both project has positive value and can be accepted if they are independent however if they are mutually
exclusive the Project S is better with higher NPV value
D. Suppose the hospital could sell off the equipment for each franchise at the end of any year.
Use NPV to determine the optimal economic life of each franchise when the salvage values are
as follows:
Answer
Optimal Life for Project L Is Three Year while optimal life for project S is one Year.