Final answer:
The NPV for Project Y is calculated using the expected net cash flows and the WACC of 15%. The same process is followed to calculate the NPV for Project Z. The IRR for both projects can be determined by finding the discount rate that makes the NPV equal to zero. The project with a positive NPV should be chosen if any.
Step-by-step explanation:
The Net Present Value (NPV) of a project is the present value of all its expected net cash flows. To calculate the NPV, we need to discount the cash flows at the company's Weighted Average Cost of Capital (WACC), which is given as 15% in this case. For Project Y, the net cash flows are $50,000 in Year 1, $70,000 in Year 2, and $100,000 in Year 3. Using the NPV formula, we can calculate the NPV for Project Y as follows:
NPV (Project Y) = -Initial Investment + PV of Year 1 Cash Flow + PV of Year 2 Cash Flow + PV of Year 3 Cash Flow
For Project Z, the net cash flows are $20,000 in Year 1, $30,000 in Year 2, and $50,000 in Year 3. Using the NPV formula, we can calculate the NPV for Project Z as follows:
NPV (Project Z) = -Initial Investment + PV of Year 1 Cash Flow + PV of Year 2 Cash Flow + PV of Year 3 Cash Flow
The Internal Rate of Return (IRR) of a project is the discount rate that makes the NPV equal to zero. To calculate the IRR for Project Y, we need to find the rate at which the sum of the present values of the cash flows equals zero. Similarly, we can calculate the IRR for Project Z. Finally, to determine which project the company should choose, we compare the NPVs of both projects. If a project has a positive NPV, it is considered profitable and should be chosen.