Task 3

Table 1

Given

Project
A B C
Investment $120,000 $120,000 $200,000
Year Cash Inflows
1 $40,000 $30,000 $50,000
2 $40,000 $30,000 $50,000
3 $40,000 $40,000 $80,000
4 $30,000 $40,000 $80,000
5 $30,000 $40,000 $80,000
Cost of capital 14% 14% 17%

Table 2

NPV and IRR of each project

Project
A B C
Ye
ar ($120,0 ($120,0 ($200,0
0 00) 00) 00)
$40,00 $30,00 $50,00
1 0 0 0
$40,00 $30,00 $50,00
2 0 0 0
$40,00 $40,00 $80,00
3 0 0 0
$30,00 $40,00 $80,00
4 0 0 0
$30,00 $40,00 $80,00
5 0 0 0
NP $6,208. $856.6 $8,391.
V 75 3 26
IR
R 16% 14% 19%
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This is to show how I computed for the NPV of each project. The formula is:

NPV = ∑ CFn/¿(1+i)n−Initial investment

Present Value
A B C
Year ($120,000) ($120,000) ($200,000)
1 $35,087.72 $26,315.79 $42,735.04
2 $30,778.70 $23,084.03 $36,525.68
3 $26,998.86 $26,998.86 $49,949.64
4 $17,762 $23,683.21 $42,692.00
5 $15,581.06 $20,774.75 $36,488.89
Total
PV $126,208.75 $120,856.63 $208,391.26
NPV $6,208.75 $856.63 $8,391.26

Based on the NPV figures, OPQ Inc. should choose Project C as it has the highest NPV

of $8,391.26. NPV is a financial metric that calculates the present value of expected cash flows

and takes into account the discount rate to assess the profitability of an investment. The higher

the NPV, the more financially attractive the project. However, the problem mentioned that

Project C is riskier than Projects A and B. In situations where projects have different levels of

risk, companies need to assess the trade-off between expected returns and risk. High-risk projects

may offer the potential for higher returns but also come with increased uncertainty and potential

downside. The decision to choose a project with the highest NPV should consider risk

management strategies, and the overall risk profile of the company. It's possible that a project
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with a lower NPV (positive) but lower risk may be preferred over a project with a higher NPV

but higher risk, depending on the company's risk tolerance and objectives.

Based on the IRR values, OPQ Inc. should choose Project C as well. With an IRR of

19%, Project C offers the highest return on investment among the three options. Project A has an

IRR of 16% and Project B has an IRR of 14%. The IRR represents the rate of return that the

project is expected to generate. It is essential to compare the IRR of each project to the required

rate of return or the company's cost of capital. A project with an IRR higher than the required

rate of return is generally considered more favorable as it indicates that the project's returns

exceed the minimum expected return.