Use the template to calculate the net cash flows, NPV and IRR of the projects.Net Cash FlowProject/Year 0 1 2 3Project A Net Cash FlowProject B Net Cash FlowNPV of A = IRR (A) =NPV of B = IRR (B) =Working TableDiscount rate = 10.0%Item/Year 0 1 2 3Capital Costs - A -100Capital Costs - B -100Operating Costs - A-20 -25 -30Operating Costs - B-15 -20 -25Gross Revenues - A 70 65 60Gross Revenues - B 45 65 75Net Revenues - ANet Revenues - B
Question
Use the template to calculate the net cash flows, NPV and IRR of the projects.Net Cash FlowProject/Year 0 1 2 3Project A Net Cash FlowProject B Net Cash FlowNPV of A = IRR (A) =NPV of B = IRR (B) =Working TableDiscount rate = 10.0%Item/Year 0 1 2 3Capital Costs - A -100Capital Costs - B -100Operating Costs - A-20 -25 -30Operating Costs - B-15 -20 -25Gross Revenues - A 70 65 60Gross Revenues - B 45 65 75Net Revenues - ANet Revenues - B
Solution
First, we need to calculate the net cash flows for each project for each year.
Net cash flow is calculated as Gross Revenues - Operating Costs.
For Project A: Year 1: 70 - 20 = 50 Year 2: 65 - 25 = 40 Year 3: 60 - 30 = 30
For Project B: Year 1: 45 - 15 = 30 Year 2: 65 - 20 = 45 Year 3: 75 - 25 = 50
So, the net cash flows for the projects are:
Project A: -100, 50, 40, 30 Project B: -100, 30, 45, 50
Next, we calculate the NPV (Net Present Value) for each project. The formula for NPV is:
NPV = ∑ [Cash inflow for year n / (1 + discount rate)^n] - Initial investment
For Project A: NPV = [50 / (1 + 0.1)^1] + [40 / (1 + 0.1)^2] + [30 / (1 + 0.1)^3] - 100 NPV = 45.45 + 33.06 + 22.52 - 100 NPV = 1.03
For Project B: NPV = [30 / (1 + 0.1)^1] + [45 / (1 + 0.1)^2] + [50 / (1 + 0.1)^3] - 100 NPV = 27.27 + 37.19 + 37.69 - 100 NPV = 2.15
Finally, we calculate the IRR (Internal Rate of Return) for each project. The IRR is the discount rate that makes the NPV of all cash flows (including the initial investment) from a project equal to zero.
Calculating IRR usually requires trial and error or financial calculator or software. However, in this case, we can see that the IRR for both projects would be slightly above the discount rate of 10% since the NPVs are positive at this discount rate.
So, the final results are:
Project A: Net Cash Flow: -100, 50, 40, 30 NPV: 1.03 IRR: >10%
Project B: Net Cash Flow: -100, 30, 45, 50 NPV: 2.15 IRR: >10%
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