corporate finance

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corporate finance

Postby pradeeppdy » Thu Apr 18, 2013 11:43 am

Question-"Consider the two projects below. The cash flows as well as the NPV and IRR for the two projects are given. For both projects, the required rate of return is 10 percent.
Project 1 Project 2
Cash Flows
Project A−100 36 36 36 36 14.12 16.37
Project B −100 0 0 0 175 19.53 15.02
16.37 15.02
What discount rate would result in the same NPV for both projects?
A. A rate between 0.00 percent and 10.00 percent.
B. A rate between 10.00 percent and 15.02 percent.
C. A rate between 15.02 percent and 16.37 percent.
Please explain it with solutions hint.

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corporate finance

Postby lokesh1 » Thu Apr 18, 2013 2:52 pm

Hey Pradeep

The correct option for this question should be B, i.e. a rate between 10% and 15.02%.
Hint:Try to draw the NPV schedule for the two projects simultaneously. You don't have to do any calculation. The question demands a simple application of graph analysis.

This is not that tough.
If you are still unable to find out, reply back. I would provide you with more hint.

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corporate finance

Postby pradeeppdy » Sat Apr 20, 2013 11:32 am

hi lokesh'
I didn't understand yet so please provided me some more hints.

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Postby gauravgarg » Wed May 08, 2013 10:44 am

Hi Pradeep,

You can do sensitivity of NPV values for Projects A & B using discount rate range from 9 % to 16%.
From the resultant data table you can see that between 13% to 14% discount rate, both Projects tend to give same NPV in the range of 6.xx

Exact point of convergence can be found by plotting the graph or using goal seek or doing iterations between 13% to 13.4%.

Not able to post the Excel here, you can send your email id on which i can share the excel.


Rate--> 10% 10% 11% 12% 13% 14% 15% 16%
NPV A 13.31 12.83 10.53 8.34 6.27 4.29 2.42 0.63
B 18.58 17.75 13.76 10.01 6.49 3.17 0.05 -2.89

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