Compare which project will bring higher value for the Corporation? Students are required to calculate the IRR, NPV. Students are requested not only calculating but also explaining in words.

Question

company expect the turnover will grow up approximately 6.21% and eight years later around 6.7%. The cost of goods sold will account for 46% of sale, the operating expenses including salary, administration expenses, electricity, and technology account for 15% of total sale and the tax accounts for 25% of total sale.

the following cashflows are expected with the interest rate is 10% compound p.a:

	Project 1	Project 2
Initial outlay	$                    (300)	$                   (400)
1 year's time	$                        85	$                       87
2 year's time	$                        90	$                       95
3 year's time	$                      105	$                     110
4 year's time	$                      113	$                     110
5 year's time	$                        97	$                     110
6 year's time	$                      100	$                       90
7 year's time	$                      104	$                       85
8 year's time	$                        97	$                       60

Answer 1

project 1 - NPV = 202.74 IRR = 28%

project 2 - NPV = 88.93 IRR = 17%

The NPV is performed by dividing each cash flow, except the initial outlay, by (1+discount rate)^(period)

so for example project 1 for year 1 is 85/(1.1) for year two it s 90/(1.1)² year 3 would be 105/(1.05)³ and so forth.

You can perform this with a financial calculator or excel as I did. By hand is tedious but if your professor wants this then it is what it is.

The IRR is an iterative process so really we have to use excel or a financial calculator. It is the discount rate that would make the NPV zero.

Both projects have a positive NPV and their IRR is greater than the discount rate, 10%, and should be accepted. However, if these projects are mutually exclusive project 1 should be selected because it has a higher NPV and IRR. It is due to the smaller initial outlays and stronger cash flows at the end of the project.