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Task 3

OPQ Inc. is considering three mutually exclusive projects, Project A costing $120,000 with cash flows of $40,000 for years 1-3 and $30,000 for years 4-5, Project B also costing $120,000 with cash flows of $30,000 for years 1-2 and $40,000 for years 3-5, and Project C costing $200,000 with cash flows of $50,000 for years 1-2 and $80,000 for years 3-5. OPQ will use a 14% discount rate for Projects A and B and 17% for the riskier Project C. The document asks for the NPV and IRR of each project

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155 views1 page

Task 3

OPQ Inc. is considering three mutually exclusive projects, Project A costing $120,000 with cash flows of $40,000 for years 1-3 and $30,000 for years 4-5, Project B also costing $120,000 with cash flows of $30,000 for years 1-2 and $40,000 for years 3-5, and Project C costing $200,000 with cash flows of $50,000 for years 1-2 and $80,000 for years 3-5. OPQ will use a 14% discount rate for Projects A and B and 17% for the riskier Project C. The document asks for the NPV and IRR of each project

Uploaded by

Alexander Flores
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Task 3

OPQ Inc. considers investment in three mutually-exclusive projects. Project A costs $120,000 in
Year 0 and generates the free cash flow of $40 thousand per annum during the first three years, and
$30 thousand in Years 4 and 5. Project B also costs $120,000 in Year 0 and generates the free cash
flow of $30 thousand in Years 1 and 2, and $40 thousand in Years 3 through 5. Project C costs
$200,000 in Year 0 and generates the free cash flow of $50 thousand in Years 1 and 2, and $80
thousand in Years 3 through 5. OPQ Inc. considers applying the 14% cost of capital as a discount
rate for Projects A and B. Project C is riskier than Projects A and B. Therefore, OPQ Inc.
management believes that they should apply the 17% cost of capital as a discount rate for Project C.
What is the NPV and the IRR of each project? Which project should OPQ Inc. choose based on the
NPV numbers? Which project should OPQ Inc. choose based on the IRR figures?

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