COURSE : MIDTERM EXAM - FINANCIAL MANAGEMENT

NAME : IKE SUYANTI

STUDENT ID : 29318417

CASE
a. Project’s payback period

Project A = 2.07 years or 25 months

Project B = 1.6 years or 20 months

b. The Net Present Value (NPV)

DETERMINING THE NET PRESENT VALUE (NPV)

Project A Project B
The firm's cost of capital 11%
Initial investment (CF0) -$120,000 -$90,000
Year (t) Cash inflows (CFt)
1 $55,000 $55,000
2 $60,000 $55,000
3 $65,000 $55,000
4 $70,000 $55,000
5 $75,000 $55,000
NPV $116,394.35 $113,274
CHOOSE OF PROJECT Project A

c. The Internal Rate of Return (IRR)

DETERMINING THE INTERNAL RATE OF RETURN (IRR)

Project A Project B
Initial investment (CF0) -$120,000 -$90,000
1 $55,000 $55,000
2 $60,000 $55,000
3 $65,000 $55,000
4 $70,000 $55,000
5 $75,000 $55,000
IRR 42.67% 54.07%
CHOOSE OF PROJECT Project B
d. Draw the net present value profiles for both project on the same set of axes, and discuss
any confict in ranking that may exist between NPV and IRR

Project A
NPV ($)

Project B

IRR Project A

IRR Project B

Discount Rate (%)

 From graph above depicts a project’s NPVs for various discount rates. When NPV = 0,
There are different IRR from Project A and Project B.
 There are a conflict of ranking. At left side, IRR of project A is higher than project B and
at right side and IRR of project B is higher .

e. Summarize the preferences dictated by each measure, and indicate which project you
woud recomended. Explain why

 The IRR of projects A and B given higher than 11% cost of capital, we can say that both
projects are acceptable.
 As we get conflict in ranking , the result of Intersection point from two line is a 13.9% .
 The cost of capital is approximately 11% less than 13.9% at that rate project A has a
higher IRR than project B (the red line is above the blue line when
the discount rate is 11%).
 Based on analysis result, we recomended Project A.