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Swanson Industries has a project with the following projected cash flows:
Initial Cost, Year 0: $240,000
Cash flow year one: $25,000
Cash flow year two: $75,000
Cash flow year three: $150,000
Cash flow year four: $150,000
a. Using a 10% discount rate for this project and the NPV model should this project be accepted or rejected?
b. Using a 15% discount rate?
c. Using a 20% discount rate?
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What are the IRRs of the four projects for Swanson Industries in problem #9?
Solution, this is an iterative process but can be solved quickly on a calculator or spreadsheet.
Enter the keys noted for each project in the CF of a Texas BA II Plus calculator
|
Cash Flows |
Project M |
Project N |
Project O |
Project P |
|
CFO |
-$2,000,000 |
-$2,000,000 |
-$2,000,000 |
-$2,000,000 |
|
CO1, F1 |
$500,000, 1 |
$600,000, 1 |
$1,000,000, 1 |
$300,000, 1 |
|
CO2, F2 |
$500,000, 1 |
$600,000, 1 |
$800,000, 1 |
$500,000, 1 |
|
Year three |
$500,000, 1 |
$600,000, 1 |
$600,000, 1 |
$700,000, 1 |
|
Year four |
$500,000, 1 |
$600,000, 1 |
$400,000, 1 |
$900,000, 1 |
|
Year five |
$500,000, 1 |
$600,000, 1 |
$200,000, 1 |
$1,100,000, 1 |
|
CPT IRR |
7.93% |
15.24% |
20.27% |
17.72% |