Question

Trudeau, Inc. is considering Project A and Project B, which are two mutually exclusive projects with unequal lives.

Project A is an eight-year project that has an initial outlay or cost of $140,000. its future cash inflows for years 1 through 8 are the same at $36,500. Project B is a six-year project that has an initial outlay or cost of $160,000. its future cash flows for year 1 through 6 are the same at 48,000. Trudeau's discount rate (hurdle rate) is 13%.a. find the Net Present Value of Project A and B. if Trudeau has enough resources to invest both into project A and B separately, will he accept them?b. calculate IRR for Project A and B, will he accept these projects based on IRR method?

Answer 1

NPV

Project A - $35,155.12

Project B - $31,882.39

Tradeau would choose both project A and B

IRR

Project A - 20.01%

Project B - 19.91%

Tradeau would choose both project A and B

Step-by-step explanation:

The NPV is the discounted cash flow less the amount invested.

The IRR is the discount rate that equates the after tax cash flows from an investment to the amount invested.

The NPV and IRR can be found using a financial calculator:

NPV and IRR for project A

Cash flow for year 0 = $-140,000

Cash flow each year from year 1 -8 = $36,500

I = 13%

NPV = $35,155.12

IRR = 20.01%

NPV and IRR for project B

Cash flow for year 0 = $-160,000

Cash flow for year one to six = $48,000

I =13%

NPV = $31,882.39

IRR = 19.91%

The decision criteria using the NPV is to choose the project with postive NPV. both projects have a positive NPV so they would both be chosen.

The decision criteria using the IRR is to choose the project with IRR greater than the discount rate. Both IRRs are greater than the discount rate, so both projects would be chosen.

I hope my answer helps you