Unformatted text preview: (Net present value, profitability index, and internal rate of return calculations) You are considering two independent projects, project A and project B. The initial cash outlay associated with project A is $50,000 and the initial cash outlay associated with project B is $70,000. The required rate of return on both projects is 12 percent. The expected annual free cash flows from each project are as follows: Year Project A Project B50,00070,000 1 12,000 13,000 2 12,000 13,000 3 12,000 13,000 4 12,000 13,000 5 12,000 13,000 6 12,000 13,000 Calculate the NPV, PI, and IRR for each project and indicate if the project should be accepted. Year Project A PV @12% Year Project B PV @12%50,000 $50,000.00 70,000 $70,000.00 1 12,000 $10,714.29 1 13,000 $11,607.14 2 12,000 $9,566.33 2 13,000 $10,363.52 3 12,000 $8,541.36 3 13,000 $9,253.14 4 12,000 $7,626.22 4 13,000 $8,261.74 5 12,000 $6,809.12 5 13,000 $7,376.55 6 12,000 $6,079.57 6 13,000 $6,586.20 Total present value = $49,336.89 Total present value = $53,448.30 NPV = $663.11 NPV = $16,551.70 IRR = 11.53% IRR = 3.18% PI = 0.99 PI = 0.76 Profitability Index = present value of cash inflows/ cash outlay Both the projects should be rejected as they have negative NPV, IRR is less than the required rate of return and PI is less than 1....
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This note was uploaded on 02/16/2012 for the course AMERICAN I American I taught by Professor Americaninternationcollege during the Spring '12 term at American Internation College.
 Spring '12
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