For the following problem, compute NPV, PI and IRR. Then calculate the Terminal Value (TV). By TV, I mean what will be the cash flow or value of the company at the end of five years.
Your company is evaluating Projects A and B.
Year Project A Project B
0 -70,000 -70,000
1 10,000 50,000
2 20,000 40,000
3 30,000 20,000
4 45,000 10,000
5 60,000 10,000
Your company has a cost of capital 0f 14%, which is expected to remain constant at 14%. However, the reinvestment rate will be 20%. In the examples and methods, I have shown earlier, there was an implicit assumption that reinvestment of funds is at cost of capital, in NPV and PI models and at IRR in the IRR model.
Select the right model and make your recommendation to help the management to make a decision.