00:02
We have to determine which projects the firm should accept and the resulting budget for the year.
00:08
So we need to calculate the net present value.
00:10
That is npv for each project and compare it to their respective cost.
00:14
So the npp formula is npv is equal to cf1 divided by 1 added to r to the power 1 added to cf2 divided by 1 added to r whole square added to so on added to cfn divided by 1 added to r to the power n subtracted from c where cf1 is equal to cash flow in year 1 r is equal to discount rate that is wacc n is equal to number of years and c is equal to initial investment cost.
01:05
So now let's calculate the npv for each project and determine which ones should be accepted.
01:18
So project a cash flows year 1 is equal to 14 % of dollar 5 .6 million, which is equal to dollar 0 .784 million.
01:43
So npv is equal to 0 .784 divided by 1 added to 0 .12 to the power 1 subtracted from 5 .6 is equal to 0 .702 subtracted from 5 .6 we get minus 4 .898 project being cash flow.
02:20
Year one is equal to 13 .5 % of dollar 4 .7 million, which is equal to dollar 0 .6 3 4 5 million npv is equal to 0 .6 3 4 5 divided by 1 added to 0 .12 to the power 1 subtracted from 4 .7 is equal to 0 .566 subtracted from 4 .7.
02:59
So evaluating it we get minus 4 .134 project seen cash flows year one is equal to 11 % of dollar 7 .5 million is equal to dollar 0 .825 million over npv is equal to 0 .42.
03:36
So is 0 .825 divided by 1 added to 0 .12 to the power 1 subtracted from 7 .5 is equal to 0 .736 subtracted from 7 .5...