Case
Solutions to mini case 1 AFM (grade: 10/10)
- Module
- Institution
Correct solutions to mini case 1 of the course Advanced financial management at the VU. Grade: 10/10 Teachers: schauten & dijkstra
[Show more]
Seller
Followisabellaarnoldcrdenas
Reviews received
Content preview
Advanced Financial Management - Mini-case week 1 Isabella Arnold, 2665767Plagiarism statement
I hereby certify that the following is my own work and my work alone. I also certify that
the content in this document has not previously been submitted for any other assignment in
this course or any other course, and that I have not copied or otherwise plagiarized
the work of others.
Question 1:
1. What are the NPV, PI, and IRR for projects A and B? What has caused the ranking
conflicts? Should project A or B be chosen? Assume that these projects are
not considered under a capital constraint.
𝐶𝐹! 𝐶𝐹"
𝑁𝑃𝑉 = −𝐼 + + ⋯ +
(1 + 𝑟)! (1 + 𝑟)"
$%&'' $%&'' ,''''
e.g. 𝑁𝑃𝑉# = −75000 + (!)!'%) + (!)!'%)! + (!)!'%)" = 42081,14
I did the same for project B, taking the investment and CFs of project B into account.
The NPV for project A: 42.081,14
The NPV for project B: 36.908,34
𝑁𝑃𝑉 + 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑃𝐼 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
-$'%!,!-)/&'''
e.g. 𝑃𝐼# = /&'''
= 1.56
I did the same for project B, taking the NPV and investment of project B into account.
The PI for project A: 1.56
The PI for project B: 1.49
𝐶𝐹! 𝐶𝐹"
𝑁𝑃𝑉 = −𝐼 + + ⋯+ =0
(1 + 𝐼𝑅𝑅)! (1 + 𝐼𝑅𝑅)"
Solve for IRR
$%&'' $%&'' $%&''
e.g. 𝑁𝑃𝑉# = −75000 + (!)011) + (!)011)! + (!)011)" = 0 → 𝑆𝑜𝑙𝑣𝑖𝑛𝑔 𝑓𝑜𝑟 𝐼𝑅𝑅 = 33.63%
I did the same for project B, taking the investment and CFs of project B into account.
The IRR for project A: 33.63%
The IRR for project B: 36.31%
, Advanced Financial Management - Mini-case week 1 Isabella Arnold, 2665767
- The fact that in project A the last cash flow is a rather high one explains the difference
in the internal rates of return as we can see that in project B the cash flows remain the
same at each t. The higher a cash flow is in time, the lower the PV of that cash flow
will be, which explains the lower IRR in project A.
- Project A should be chosen as we are seeking for wealth creation, and project A
creates more wealth. The PI for project A is also higher which implies a good project.
Question 2:
2. What are the NPV, PI, and IRR for projects C and D? Should project C or
D be chosen? Assume that these projects are not considered under a capital
constraint.
𝐶𝐹! 𝐶𝐹"
𝑁𝑃𝑉 = −𝐼 + + ⋯+
(1 + 𝑟)! (1 + 𝑟)"
$&'''
e.g. 𝑁𝑃𝑉2 = −20000 + (!)!'%) = 2727,27
I did the same for project D, taking the investment and CFs of project D into account.
The NPV for project C: 2727,27
The NPV for project D: 1090,91
𝑁𝑃𝑉 + 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑃𝐼 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
$/$/,$/)$''''
e.g. 𝑃𝐼2 = $''''
= 1.14
I did the same for project D, taking the NPV and investment of project D into account.
The PI for project C: 1.14
The PI for project D: 1.14
𝐶𝐹! 𝐶𝐹"
𝑁𝑃𝑉 = −𝐼 + + ⋯+ =0
(1 + 𝐼𝑅𝑅)! (1 + 𝐼𝑅𝑅)"
Solve for IRR
$&'''
e.g. 𝑁𝑃𝑉2 = −20000 + (!)011) = 0 → 𝑆𝑜𝑙𝑣𝑖𝑛𝑔 𝑓𝑜𝑟 𝐼𝑅𝑅 = 25%
I did the same for project D, taking the investment and CFs of project D into account.
The IRR for project C: 25%
The IRR for project D: 25%
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller isabellaarnoldcrdenas. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £4.71. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
81113 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy revision notes and other study material for 14 years now