Question 4 Swanson Industries has four potential projects all with an initial cost of $2,000,000 The capital budget for the year will only allow Swanson industries to accept one of the four projects Given the discount rates and the future cash flows of each project, which project should they accept Cash Flows Project M Project N Project O Project P Year one $500,000 $600,000 $1,000,000 $300,000 Year two $500,000 $600,000 $800,000 $500,000 Year three $500,000 $600,000 $600,000 $700,000 Year four $500,000 $600,000 $400,000 $900,000 Year five $500,000 $600,000 $200,000 $1,100,000 Discount Rate 5 9 15 22 Answer Find the NPV of each project and compare the NPVs Project M's NPV $2,000,000 $500,000 1 05 $500,000 1 05 2 $500,000 1 05 3 $500,000 1 05 4 $500,000 1 05 5 Project M's NPV $2,000,000 $476,190 48 $453,514 74 $431,918 80 $411,351 24 $391,763 08 Project N's NPV $164,738 34 Project N's NPV $2,000,000 $600,000 1 09 $600,000 1 09 2 $600,000 1 09 3 $600,000 1 09 4 $600,000 1 09 5 Project N's NPV $2,000,000 $550,458 72 $505,008 00 $463,331 09 $425,055 13 $389,958 83 Project N's NPV $333,790 77 4 Project O's NPV $2,000,000 $1,000,000 1 15 $800,000 1 15 2 $600,000 1 15 3 $400,000 1 15 4 $200,000 1 15 5 Project O's NPV $2,000,000 $869,565 22 $604,914 93 $394,509 74 $228,701 30 $99,435 34 Project O's NPV $197,126 53 Project P's NPV $2,000,000 $300,000 1 22 $500,000 1 22 2 $700,000 1 22 3 $900,000 1 22 4 $1,100,000 1 22 5 Project P's NPV $2,000,000 $245,901 64 $335,931 20 $385,494 82 $406,259 18 $406,999 18 Project P's NPV $219,413 98 (would reject project regardless of budget) And the ranking order based on NPVs is, Project N NPV of $333,790 77 Project O NPV of $197,126 53 Project M NPV of $164,738 34 Project P NPV of $219,413 98 Swanson Industries should pick Project N Question 5 What are the IRRs of the four projects for Swanson Industries in problem 4

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Question: Question 4 Swanson Industries has four potential projects all with an initial cost of $2,000,000. The capital budget for the year will only allow Swanson

Question 4

Swanson Industries has four potential projects all with an initial cost of $2,000,000. The capital

budget for the year will only allow Swanson industries to accept one of the four projects. Given

the discount rates and the future cash flows of each project, which project should they accept?

Cash Flows

Project M

Project N

Project O

Project P

Year one

$500,000

$600,000

$1,000,000

$300,000

Year two

$500,000

$600,000

$800,000

$500,000

Year three

$500,000

$600,000

$700,000

Year four

$500,000

$600,000

$400,000

$900,000

Year five

$500,000

$600,000

$200,000

$1,100,000

Discount Rate

15%

22%

Answer:

Find the NPV of each project and compare the NPVs.

Project M's NPV = -$2,000,000 + $500,000/1.05 + $500,000/1.05

+ $500,000/1.05

Project M's NPV = -$2,000,000 + $476,190.48 + $453,514.74 + $431,918.80 +

$411,351.24 + $391,763.08

Project N's NPV = $164,738.34

Project N's NPV = -$2,000,000 + $600,000/1.09 + $600,000/1.09

+ $600,000/1.09

Project N's NPV = -$2,000,000 + $550,458.72 + $505,008.00 + $463,331.09 +

$425,055.13 + $389,958.83

Project N's NPV = $333,790.77

Project O's NPV = -$2,000,000 + $1,000,000/1.15 + $800,000/1.15

+ $600,000/1.15

+ $400,000/1.15

+ $200,000/1.15

Project O's NPV = -$2,000,000 + $869,565.22 + $604,914.93 + $394,509.74 +

$228,701.30 + $99,435.34

Project O's NPV = $197,126.53

Project P's NPV = -$2,000,000 + $300,000/1.22 + $500,000/1.22

+ $700,000/1.22

$900,000/1.22

+ $1,100,000/1.22

Project P's NPV = -$2,000,000 + $245,901.64 + $335,931.20 + $385,494.82 +

$406,259.18 + $406,999.18

Project P's NPV =-$219,413.98 (would reject project regardless of budget)

And the ranking order based on NPVs is,

Project N - NPV of $333,790.77

Project O - NPV of $197,126.53

Project M - NPV of $164,738.34

Project P - NPV of -$219,413.98

Swanson Industries should pick Project N.

Question 5

What are the IRRs of the four projects for Swanson Industries in problem 4?

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