Net Present Value Calculation for Project Comparison

Cost of Capital for Equilibrium NPV

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Question

Shelby Inc. is considering two projects which have the following cash flows:

Project 1Project 2 -

Time Cash Flows Cash Flows -

0-$2,000-$1,900

1500 1,100

2700 900

3800 800

41,000 600

51,100 400

At what cost of capital would the two projects have the same net present value?

Answers

Explanations

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A. B. C. D. E.

B

Subtract Project 2 cash flows from Project 1 cash flows:

CF(0) = -100 -

CF(1) = -600 -

CF(2) = -200 -

CF(3) = 0 -

CF(4) = 400 -

CF(5) = 700 -

Put these in the cash flow register and solve for the IRR = 5.85%.

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