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Assignment 1: NPV and IRR, Mutually Exclusive Projects: Net Present Value 1,930,110.40 2,251,795.46

Hunt Inc. is considering investing in either CAM X or CAM Y manufacturing equipment. CAM X costs $3,600,000 with annual after-tax cash flows of $900,000 over 10 years. CAM Y costs $4,200,000 with annual after-tax cash flows of $1,050,000 over 10 years. The NPV of CAM X is $1,930,110.40 and of CAM Y is $2,251,795.46, so CAM Y should be recommended based on having the higher NPV. Both CAM X and CAM Y have an IRR of 21%, but CAM Y should still be recommended as it produces a larger NPV and will increase firm value more.

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Giselle Martinez
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505 views

Assignment 1: NPV and IRR, Mutually Exclusive Projects: Net Present Value 1,930,110.40 2,251,795.46

Hunt Inc. is considering investing in either CAM X or CAM Y manufacturing equipment. CAM X costs $3,600,000 with annual after-tax cash flows of $900,000 over 10 years. CAM Y costs $4,200,000 with annual after-tax cash flows of $1,050,000 over 10 years. The NPV of CAM X is $1,930,110.40 and of CAM Y is $2,251,795.46, so CAM Y should be recommended based on having the higher NPV. Both CAM X and CAM Y have an IRR of 21%, but CAM Y should still be recommended as it produces a larger NPV and will increase firm value more.

Uploaded by

Giselle Martinez
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Assignment 1: NPV and IRR, Mutually Exclusive Projects

Hunt Inc. intends to invest in one of two competing types of computer-aided manufacturing equipment. 
CAM X and CAM Y.  Both CAM X and CAM Y models have a project life of 10 years.  The purchase price of
the CAM X model is P3,600,000 and it has a net annual after-tax cash inflow of P900,000.  The CAM Y
model is more expensive, selling for P4,200,000, but it will produce a net annual after-tax cash inflow of
P1,050,000.  The cost of capital for the company is 10%.
Required:
1.  Calculate the NPV for each project.  Which model would you recommend?
Year CAM X CAM Y
1 900,000.00 1,050,000.00
2 900,000.00 1,050,000.00
3 900,000.00 1,050,000.00
4 900,000.00 1,050,000.00
5 900,000.00 1,050,000.00
6 900,000.00 1,050,000.00
7 900,000.00 1,050,000.00
8 900,000.00 1,050,000.00
9 900,000.00 1,050,000.00
10 900,000.00 1,050,000.00
Present Values of Cash Flows ₱5,530,110.40 ₱6,451,795.46
Less: Original Investment 3,600,000.00 4,200,000.00
Net Present Value ₱1,930,110.40 ₱2,251,795.46
CAM Y is more profitable than CAM Y because it has larger NPV. Thus, Hunt Inc. should select CAM Y.

2.  Calculate the IRR for each project.  Which model would you recommend?
Year CAM X CAM Y
Original Investment 0 -3,600,000.00 -4,200,000.00
1 900,000.00 1,050,000.00
2 900,000.00 1,050,000.00
3 900,000.00 1,050,000.00
4 900,000.00 1,050,000.00
5 900,000.00 1,050,000.00
6 900,000.00 1,050,000.00
7 900,000.00 1,050,000.00
8 900,000.00 1,050,000.00
9 900,000.00 1,050,000.00
10 900,000.00 1,050,000.00
Internal Rate of Return 21% 21%
Even though both projects have an IRR of 20%, the firm should not consider the two designs to be equally desirab
cts
turing equipment. 
he purchase price of
,000.  The CAM Y
-tax cash inflow of

igns to be equally desirable. The analysis demonstrates that Design B produces a larger NPV, and, therefore, will increase th
herefore, will increase the value of the firm more than Design A. Design B should be chosen

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