Consider the following cash flows on two not mutually exclusive investments.
Year Investment A Investment B
0 -$100 -$100
1 44 69
2 56 51
3 65 32
The required return is 15%. The investments are not mutually exclusive.
a) Calculate the NPV and IRR on both. Are they desirable? Now suppose you wanted to combine the two investments into a single investment C.
b) Calculate the combined cash flows.
c) What is the NPV of C?
d) How does the NPV of C relate to the NPV's of A and B considered separately?
e) Based on your answer to (d), is there an obvious shortcut that we could have used to calculate the NPV of C?
f) Based on the combined cash flows, calculate the IRR for C. How does your answer relate to the IRRs for A and B?
g) Is there an obvious shortcut that we could have used to calculate the IRR of C?