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Assignment 3 PM

The document analyzes multiple projects for Swanson and Campbell Industries using Net Present Value (NPV) calculations to determine which projects to accept. Swanson Industries should choose Project N with an NPV of $333,791, while Campbell Industries should accept Project S with an NPV of $344,038. Additionally, a comparison between Project Alpha and Project Beta shows that Project Beta is more viable due to its higher NPV of $186,864, despite both having the same Internal Rate of Return (IRR) of 12.98%.

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24 views8 pages

Assignment 3 PM

The document analyzes multiple projects for Swanson and Campbell Industries using Net Present Value (NPV) calculations to determine which projects to accept. Swanson Industries should choose Project N with an NPV of $333,791, while Campbell Industries should accept Project S with an NPV of $344,038. Additionally, a comparison between Project Alpha and Project Beta shows that Project Beta is more viable due to its higher NPV of $186,864, despite both having the same Internal Rate of Return (IRR) of 12.98%.

Uploaded by

sanketpawar1574
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Assignment - 3

Name : Sanket Pawar


URN : 2023-B-15072004A

1) We need to determine which project Swanson Industries should accept


using Net Present Value (NPV).
Ans:-

NPV = ∑ Ct – Co / (1+r)

Where:

C = Cash inflow in year t

R=Discount rate

Co=Initial investment

t= Year

Project M (Discount Rate: 6%)

Year Value

1 $411,698

2 $444,998

3 $419,810

4 $ 36,047

5 $ 373,629

Total Present Value: $2,106,182

NPV = ∑ Ct /(1+6)^t - 2000,000

NPV = $106,182
Project N (Discount Rate: 9%)

Year Value

1 $550,459

2 $505,008

3 $463, 310

4 $425,055

5 $389, 959

Total Present Value: $2,333,791

NPV= ∑ct / (1+9)^t - 2,000,000

NPV = $333,791

Project o (Discount Rate : 15%)

Year! Value

1 $869,565

2 $604,915

3 $394, 510

4 $228, 701

5 $99,435

Total Present Value: 2,197,127

NPV = ∑ Ct /(1+15)t - Co

NPV = $197,127

Project P (Discount Rate : 22%)

Year Value

1 $245,902
2 $335,931

3 $ 385,495

4 $406,259

5 $406,999

Total Present Value: $1,780, 586

NPV= ∑ ct / (1+22)t - Co

NPV=-219,414

(Not NPV, not a good investment)

Since Project N has the high highest NPU ($333,791), Swanson Industries should choose Project N.

2) To determine which project Campbell Industries should accept, we


calculate we will the Net Present Value (NPV) for each project using the
formula.
Ans:-

NPY= Σ ct/ (1+r) - Co

Where,

C = Cash flow in year t

r = Discount rate

Co = Initial investment ($1,500,000)

t= Year

Project Q (Discount Rate: 4%)

Year Value

1 $336,538

2 $323, 5985

3 $311, 149

4 $299,181
5 $287,674

Total Present Value: $1,558,138

NPV = Σ Ct/(144)t - 1,500,000

NPV = 58,138

• Project R. (Discount Rate : 8%)

Year Value

1 $ 370,370

2 $342, 936

3 $317,533

4 $294,012

5 $272,233

Total Present Value: $1,597,084

NPV= Σ Ct /(1+8) t - 1,500,000

NPV = 97,084

Projects (Discount Rate: 13%)

Year Value

1 $619,469

2 $469, 888

3 $346, 525

4 $245,327

5 $162,828

Total Present Value: $1,844,038

NPV = Σ Ct/(1+13) - 1,500,000

NPV =$344,038
Project T(Discount Rate: 18%)

Year Value

1 $ 169,492

2 $287,274

3 $365, 179

4 $412,631

5 $431, 109

Total Present Value: $1,671,684

NPV= Σ Ct / (1+18) - 1,500,000

NPV=$171,684

Project S has the highest NPV ($344,038), Campbell Project S, as Industries should accept it provides
the most value

3) To determine the optimal investment we will calculate the Net


Present Value (NPV) for both projects using formula:
Ans:-

NPV = Σ - Ct / (1+r)t - Co

Where,

Ct = Cash flow in year t

r = Discount rate (8%)

Co = Initial investment

t = Year (1406)
NPVs for each project are:

• Project Alpha: $155,720

•Project Beta: $186,864

(i) Which project is viable for why? you and

NPV Comparison:

Project Beta ($186,864) bas a highest NPV than Project Alpha ($155,720)

A higher NPV indicates that Project Beta will generate mare value for the company in present terms.

Both projects have the same discount rate (8%) and duration (6years)

However, Project Beta's plarger cash. inflow lead to a greater present value of total cash flows,
making it more attractive financially. The decision then primarily depends on. which project provides
the highest return, which in this case is Project Beta

(ii) Calculate the present value of Project Alpha if the discount rate is increased to 10%. How does
this change affect the investment decision?

PV= Ct / (1+r)t

Ct = 250,000 (Annual cash inflow)

r = 10% = 0.10 (Discount rate)

t= Year (1406)

Cash flows

Year 1 = 250,000 / (1.10) = 227,273

Year 2 = 250,000 / (1.10) = 206,612

Year 3 = 250.000 / (1.10)3 = 187,829

Year 4= 250,000 / (1.10)4 = 170,753

Year 5 = 250,000 / (1.10)5 = 155,230

Year 6= 250,000 / (1.10) = 141,118

Total Present Value of Clash Flows


227,273 + 206612 + 187,829 + 170,753+ 155,230 + 141,118 = 1,088,815

Net Present Value (NPV) Calculation.

NPV = Total Peresent Value - Initial Investment

NPV = 1,088,815-1,000,000

NPV = 88,815

The New NPV for Project Alpha is 88,815

(iii) What are the IRR of each of these projects?

NPV = Σ Ct / (1+IRR)t - Co = 0

where

Ct = Cash flow in year t

Co = Initial investment

IRR= Internal Rate of Return

Project Alpha

- 1000000 + 250000 / ((1 + TRR) ^ 4) + 250000 / ((1 + TRR) ^ 2) + 250,000 / (1+ PRR )^ 3 + 250,000 /
(1+ PRR)^ 4 + 250,000 (1+ PRR)^ 5 + 250000 / (1+ IRR)^6 = 0

Project Beta

-1,20,000 + 300,000 / + (1+IRR)^1 + 3000,000 / (1+IRR)^2 + 3000,000/((1 + IRR) ^ 3) + 3000,000 /

((1 + IRR) ^ 4) + 3000,000 / ((1 + IRR) ^ 5) + 3000,000 / ((1 + IRR) ^ 6) = 0

Solving these equations numerically, we get

Project Alpha IRR = 12,98%

Project Beta IRR= 12:98%


Since the IRR for both projects. is the same (12.98%), it does not differentiate between them."

However, the NPV method suggests. Project Beta ($186, 864) is more valuable. than Project Alpha
($155,720).

•Project Beta remains the better choice because it offers a higher total return.

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