XYZ company has an option to invest in either project A or project B. Both projects will generate the same amount of income in four years. (1) Calculate the Present Value of cash flows of the two projects (10 points), (2) Calculate the Net Present Value of these two projects and identify which project XYZ company should choose based on your calculation (10 points).
*Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows (initial investment) over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.
(3) What is the IRR of the chosen project? (Bonus 10 points)
Project A: Initial Investment $890,000
End of Year | Net Income | Cash Flow | 12% Rate | PV of CF
1 | 300000 | 250000 | |
2 | 300000 | 350000 | |
3 | 300000 | 350000 | |
4 | 300000 | 250000 | |
Total | 1200000 | 1200000 | |
NPV of Project A:
Project B: Initial Investment $865,000
End of Year | Net Income | Cash Flow | 12% Rate | PV of CF
1 | 300000 | 50000 | |
2 | 300000 | 200000 | |
3 | 300000 | 350000 | |
4 | 300000 | 600000 | |
Total | 1200000 | 1200000 | |
NPV of Project B: