i haven't done these in a while but i'll give it a shot.
i still may be able to answer most of your questions, if not all.
a) What is the Net Present Value of each project using a discount rate of 6%?
(5 marks)
b) What is the Internal Rate of Return of each project (to the nearest 1%)?
(5 marks)
your office cash flow is:
-300
-30
90
180
215
your casino cash flow is:
-300
-400
50
100
800
the net present value and internal rate of return of your office cash flow is:
cash flow npv at 6% npv at 15%
time point
0 -300 -300 -300
1 -30 -28.30188679 -26.08695652
2 90 80.0996796 68.05293006
3 180 151.1314709 118.3529218
4 215 170.3001376 122.9269478
npv at 6% >>>>> 73.22940135
npv at 15% >>>>> -16.75415682
iror >>>>> 13.0609%
the net present value and internal rate of return of your casino cash flow is:
cash flow npv at 6% npv at 15%
time point
0 -300 -300 -300
1 -400 -377.3584906 -347.826087
2 50 44.499822 37.80718336
3 100 83.9619283 65.75162324
4 800 633.6749306 457.4025965
npv at 6% >>>>> 84.77819033
npv at 15% >>>>> -86.86468387
iror >>>>> 9.9602%
c) Explain the advice you would give to your client if their target rate of return was 15% (5 marks)
Neither cash flow returns a rate of return of 15% in 4 years.
If that is the minimum rate of return the client can stand, amd the maximum number of years in which to get it, then the client should look to some other project to provide it, since neither one meets the minimum requirements.
Looking at the cash flows, it appears that the fourth year brings in what might be the recurring profit for both scenarios.
If the client can wait another year to determine their profits, they might be able to meet their minimum rate of return of 15%.
As a sensitivity, a fifth year was added with the same profit as the fourth year.
The results of that sensitivity analysis showed that, if the client waited another year to determine their profit, they would attain the 15% in both scenarios. This assumes no additional expenses over what they had in the fourth year.
The recommendation to the client would be to go with the casino project, because that promises the greater return in the long run, and also promises to bring in the greater amount of profit ($800 per year versus $215 per year).
The 5 year cash flow results for the office project are shown below:
cash flow npv at 6% npv at 15%
time point
0 -300 -300 -300
1 -30 -28.30188679 -26.08695652
2 90 80.0996796 68.05293006
3 180 151.1314709 118.3529218
4 215 170.3001376 122.9269478
5 215 160.6605072 106.8929981
npv at 6% >>>>> 233.8899085
npv at 15% >>>>> 90.13884126
iror >>>>> 23.2302%
The 5 year cash flow results for the casino project are shown below:
cash flow npv at 6% npv at 15%
time point
0 -300 -300 -300
1 -400 -377.3584906 -347.826087
2 50 44.499822 37.80718336
3 100 83.9619283 65.75162324
4 800 633.6749306 457.4025965
5 800 597.8065383 397.7413882
npv at 6% >>>>> 682.5847286
npv at 15% >>>>> 310.8767044
iror >>>>> 27.8047%
d) What are strengths and weaknesses of NPV and the IRR investment decision criteria? (8 marks)
Here's a reference that might help you with that:
http://www.investopedia.com/exam-guide/cfa-level-1/corporate-finance/advantages-disadvantages-npv-net-present-value-irr-internal-rate-of-return.asp
e) What are sunk costs and how are they treated in analyzing cash flows?
(5 marks)
Sunk costs are already spent and are common to both plans so they are usually not considered in studies that are considering alternatives for new projects.
Here's a reference that talks about that:
https://www.boundless.com/finance/capital-budgeting/cash-flow-analysis-and-other-factors/sunk-costs/
f) Explain the difference between sensitivity analysis and scenario analysis.
Hee's a reference that talks about scenario analysis versus sensitivity analysis.
http://www.scenarioanalysis.net/Scenario-Analysis-Vs-Sensitivity-Analysis.html
here's another reference:
http://www.onlinedegreesupport.com/sensitivity_scenario_analysis.html
Here's another one that might help tie the first two together.
http://wiki.answers.com/Q/Difference_between_Sensitivity_analysis_and_Scenario_analysis
IROR calculations set the NPV to 0 and then solve for the rate of return that will provide that.
I used excel to provide the cash flow results.
there are online calculator that will do the same thing for you.
One such calculator can be found here:
http://www.datadynamica.com/irr.asp
There are other. All you have to do is perform an online search for them.
