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Chapter 7_3 to 7_6 sample questions

# Chapter 7_3 to 7_6 sample questions - 1 Tim Hortons is...

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1. Tim Horton’s is considering the following two proposals. The projected cash flows for projects X and Y are as follows: Time Period 0 1 2 3 4 5 Project X -2250 1800 900 450 225 180 Project Y -2475 225 450 900 1125 2200 a) Calculate the NPV and the IRR of each project, assuming the discount rate is 12%. ( ) ( ) ( ) ( ) % 972819 . 29 1 180 \$ 1 225 \$ 1 450 \$ 1 900 \$ 1 800 , 1 \$ 250 , 2 \$ 0 046860 . 640 \$ 12 . 1 180 \$ 12 . 1 225 \$ 12 . 1 450 \$ 12 . 1 900 \$ 12 . 1 800 , 1 \$ 250 , 2 \$ 5 4 3 2 5 4 3 2 = + + + + + + + + + + - = = + + + + + - = X X X X X X X IRR IRR IRR IRR IRR IRR NPV % 63477923 . 19 ) 1 ( 2200 \$ ) 1 ( 125 , 1 \$ ) 1 ( 900 \$ ) 1 ( 450 \$ 1 225 \$ 475 , 2 \$ 0 52924586 . 688 \$ 12 . 1 2200 \$ 12 . 1 125 , 1 \$ 12 . 1 900 \$ 12 . 1 450 \$ 12 . 1 225 \$ 475 , 2 \$ 5 4 3 2 5 4 3 2 = + + + + + + + + + + - = = + + + + + - = Y Y Y Y Y Y Y IRR IRR IRR IRR IRR IRR NPV b) If the above projects are mutually exclusive, the project to select using only the NPV criterion is: IRR criterion is: NPV: Y and IRR: X We have contradictory results! c) Because of the contradictory results in part b, we need to use the incremental cash flows of choosing project Y over project X to reconcile any differences. Time 0 1 2 3 4 5 Y -2475 225 450 900 1125 2200 X -2250 1800 900 450 225 180 Incremental Y over X -225 -1575 -450 450 900 2020 ( ) ( ) ( ) ( ) % 81082451 . 12 1 020 , 2 \$ 1 900 \$ 1 450 \$ 1 450 \$ 1 575 , 1 \$ 225 \$ 0 5 4 3 2 = + + + + + + + - + + - + - = IRR IRR IRR IRR IRR

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