BANK 3009 CVRM Continuous Assessment Questions 1A
Please submit your answers to the following questions in Excel file format via learnonline.
1) Consider the following two sets of project cash flows:
A) Assume that projects X and Y are mutually exclusive. The correct investment decision and the best rational for that decision is to:
i) invest in Project Y since IRRY > IRRX.
ii) invest in Project Y since NPVY > NPVX.
iii) neither of the above.
B) What are the incremental IRR and NPV of Project X?
C) Is the use of the incremental measures in B) appropriate to your evaluation of the preferred project? Explain.
D) Which is the preferred project? Explain and justify the basis for your choice.
(5 marks)
2) A large brokerage company is assessing the introduction of a new computer system to improve routing and execution of customer orders. The managing director wants to install a new Smart Routing system, whereas another director prefers the Direct Routing system. Each machine provides the same order-execution ability and can satisfy the broker’s obligation to give investors the best possible order execution. The initial cost of each system is $180,000, but because of differing software, maintenance, and processing requirements, estimates of the after-tax costs of operation differ. These are as follows:
Project Year 0
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Discount Rate
X -800
140 150 190 250 290 280
0.123
Y -500
190 190 90 80 90 92
0.123
Period 1
2
3
4 5 6 7
The company has an
Smart Routing 40,000
50,000 49,000 49,000 49,000 49,000 47,000
Direct Routing 60,000
62,000 62,000 62,000 53,000
after-tax weighted cost of capital of 10.45 per cent.
A) Can you determine the IRR for each project? Explain.
B) Determine the NPV for each project. Which project does NPV suggest you recommend?
C) Is NPV the correct tool with which to make your recommendations? Explain.
D) Using an appropriate method, determine which system you would recommend to the
board. Identify the calculations that support your decision.
1
(5 marks)
