Financial Management 534
Financial Management 534 2
Introduction
Question 1
10.00% 10.00% 17.00% 17.00%
Year Project A Project B Project
A
Project
B
0 -400 -650 -400 -650
1 -528 210 -528 210
2 -219 210 -219 210
3 -150 210 -150 210
4 1100 210 1100 210
5 820 210 820 210
6 990 210 990 210
7 -325 210 -325 210
NPV $478.83 $372.37 $133.76 $173.70
IRR 20.65% 25.84% 20.65% 25.84%
To obtain the IRR, the excel formula has been used. For Project A the Internal Rate of
return is 20.65% while for Project B the IRR is equal to 25.84% (Garrison, Noreen & Brewer,
2009). At the rate of 10%, the best project to select is project A as its NPV is higher than that of
Project B however its IRR is higher than that of project A. At 17%, the scenario remains the
same however the NPVs are much lower than when the discounting rate is 10%.
Financial Management 534 3
Question 2
10%
Year 0 -400 Reinvest discount
factor
Returns
Year 1 -528 6 1.771561 -935.384208 (-528*(1+0.1)^6)
Year 2 -219 5 1.61051 -352.70169 (-219(1+.1)^5)
Year 3 -150 4 1.4641 -219.615 (-150(1+.1)^4)
Year 4 1100 3 1.331 1464.1 1100(1+.1)^3
Year 5 820 2 1.21 992.2 820(1+.1)^2
Year 6 990 1 1.1 1089 990(1+.1)^1
Year 7 -325 0 1 -325 (-325(1+.1)^0)
IRR 20.65% MIRR 23.09% 1712.599102 0.230914695
MIRR=(1712.599/400)^(1/7)-
1 =0.2309 = 23.09%
17%
Year 0 -400 Reinvest discount
factor
Returns
Year 1 -528 6 2.565164 -1354.4067 (-528*(1+0.17)^6)
Year 2 -219 5 2.192448 -480.14612 (-219(1+.17)^5)
Year 3 -150 4 1.873887 -281.083082 (-150(1+.17)^4)
Year 4 1100 3 1.601613 1761.7743 1100(1+.17)^3
Year 5 820 2 1.3689 1122.498 820(1+.17)^2
Year 6 990 1 1.17 1158.3 990(1+.17)^1
Year 7 -325 0 1 -325 (-325(1+.17)^0)
IRR 20.65% MIRR 21.92% 1601.9364 0.219224304
= (1601.9364/400) ^ (1/7)-1 = 0.219224304 = 21.92%
Financial Management 534 4
10%
Year 0 -650 Reinvest discount
factor
Returns
Year 1 210 6 1.771561 372.02781 (210*(1+0.1)^6)
Year 2 210 5 1.61051 338.2071 (210(1+.1)^5)
Year 3 210 4 1.4641 307.461 (210(1+.1)^4)
Year 4 210 3 1.331 279.51 210(1+.1)^3
Year 5 210 2 1.21 254.1 210(1+.1)^2
Year 6 210 1 1.1 231 210(1+.1)^1
Year 7 210 0 1 210 (210(1+.1)^0)
IRR 25.84% MIRR 17.35% 1992.30591 0.17352355
MIRR
=(1992.30591/650)^(1/7)-
1 = 0.17352355 = 17.35%
17%
Year 0 -650 Reinvest discount
factor
Returns
Year 1 210 6 2.565164 538.6844824 (210*(1+0.17)^6)
Year 2 210 5 2.192448 460.4140875 (210(1+.17)^5)
Year 3 210 4 1.873887 393.5163141 (210(1+.17)^4)
Year 4 210 3 1.601613 336.33873 210(1+.17)^3
Year 5 210 2 1.3689 287.469 210(1+.17)^2
Year 6 210 1 1.17 245.7 210(1+.17)^1
Year 7 210 0 1 210 (210(1+.17)^0)
IRR 25.84% MIRR 21.02% 2472.122614 0.210262345
MIRR = (2472.1226/650)^(1/7)-1 = 0.21026 = 21.02%
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Question 3
Project A Project
B
Project A Project B
Year 1 -528 210 -738 -935.384208 372.02781 -1307.412 569.412
Year 2 -219 210 -429 -352.70169 338.2071 -690.9088 261.9088
Year 3 -150 210 -360 -219.615 307.461 -527.076 167.076
Year 4 1100 210 890 1464.1 279.51 1184.59 -294.59
Year 5 820 210 610 992.2 254.1 738.1 -128.1
Year 6 990 210 780 1089 231 858 -78
Year 7 -325 210 -535 -325 210 -535 0
IRR -21%
The crossover rate is -21%
The crossover rate refers to the rate at which any two companies can be compared at the same
NPV value. The crossover rate assists project managers to analyze and identify the projects to be
undertaken. The rate compares relative performance between different projects. It’s obtained by
calculating the differences in the two respective projects cash flows the deducting the results
from the differences of the two projects cash flows. The internal rate of the differences makes up
the crossover rate (Ross, Westerfield & Jaffe, 2013).
Question 4) Porter manufacturing NPV
10% 10% 10%
-100,000 -100,000 -100,000
20000 30000 40000
20000 30000 40000
20000 30000 40000
20000 30000 40000
20000 50000 70000
($24,184.26) $26,142.03 $70,259.11
The NPV for the first project is (24184.26), $26,142.03 and $70,259.11 for the three projects
respectively.
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Financial Management 534 7
References
Garrison, R., Noreen, W., & Brewer, P. (2009) Managerial Accounting , New York, NY:
McGraw-Hill Irwin. 65 -70
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013) Corporate finance (10th ed.) New York, NY:
McGraw-Hill Irwin.
