ACCCB Competency 1

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University of Phoenix *

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543

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Management

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Jul 1, 2024

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ACCCB/543 Competency 1 Assessment Course Title: Managerial Accounting and Legal Aspects of Business Competency Assessment Title: Net Present and Internal Rate of Return

The Net Present Value The net present value of each project NPV = [cash flow / (1+i) ^t] - initial investment NPV. A= ($126,000/ (1+0.8) ^4)-$400,000 = $17,327.98 NPV. B = ($52,800/ (1+0.8) ^4)-$160,000 = $14,880.30 These two positive NPV implies that the Income generated by both investment exceeds the costs of the projects. Meaning that the projected earnings generated by both projects— discounted for their present value—exceed the anticipated costs in today's dollars.

NPV For Project A Project A Initial Investment -400000 Year 1 126000 $ $116,666.67 Year 2 126000 $108,024.69 Year 3 126000 $100,022.86 Year 4 126000 $92,613.76 Discount Rate 8% NPV $417,327.98

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NPV For Project B Project B Initial Investment -160000 year 1 52800 $48,888.89 year 2 52800 $45,267.49 year 3 52800 $41,914.34 year 4 52800 $38,809.58 Rate 8% NPV $174,880.30

NPV Calculations • NPV Project A = $417,327.98 – $400,000.00 = $17,327.98 • NPV Project B = $174,880.30- $160,000.00 = $14,880.30 Using the NPV method , project A should be selected because it has a higher NPV. Meaning that the company will add more money into its accounts if they choose to invest in project A than they would with project B

Internal Rate of Return(IRR) • IRR =∑Nn=1CFn(1+IRR)n0 • IRR for Project A FCI x PV Factor = $400,000 PVF = $400,000 / $126,000 PVF = 3.174603 IRR = 400,000/ 10% or 9.931039% • IRR for Project B FCI x PV Factor =$160,000 PVF = $160,000/ $52800 PVF = 3.030303 IRR = 12% OR 12.110361% looking at the two investment options , the investor would then select the investment with the highest IRR, which is project B especially as it is above the company’s minimum threshold

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Analyzing the results of the net present value calculations and the significance of these results • Looking at the Net Present Value of the two projects, despite the fact that they both have positive NPV values, meaning they are both viable and profitable, project A should be adopted since it has the higher NPV of $17,327.98 compared to Project B with an NPV of $14,880.30

Analyzing the results of the internal rate of return calculation and the significance of these results • In terms of IRR, project B should be adopted because it has a higher Internal Rate of Return than Project A. Project A’s expected IRR is approximately 10% or 9.931039% whereas Project B’s expected IRR is approximately 12% or 12.110361% project's, implying Project B is more profitable than project A. I we put a huddle rate of say 10% for example, project B would still be higher. Thus project B should be adopted based on the IRR method.

Decision • Looking at the two methods analyzed above, using IRR method Project B looks more profitable given that it has a higher IRR compared to project A. Also project A is more capital intensive and has no salvage value, compared to B which is cheap and has a greater return. • Although the IRR rule ignores the size of the project . Project B has a higher IRR but it is also smaller in terms of initial investment , if we consider the cost of capital at say 10%, project B would still be preferable

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References • Thomas P. Edmonds, Bor-Yi Tsa & Philip R. Olds(2009) Fundamental Managerial Accounting Concepts, 5/e • https ://keys.direct/blogs/blog/how-to-calculate-net -present-value-in-excel • https://corporatefinanceinstitute.com/resourc es/valuation/net-present-value-npv/ •

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