Star System, Inc.: Evaluating Investment Proposals Using NPV and IRR

This assignment analyzes four investment proposals for Star System, Inc., using Net Present Value (NPV) and Internal Rate of Return (IRR) calculations. The analysis determines the financial viability of each project by comparing their NPVs and IRRs to the cost of capital. Project A and D are accepted due to their positive NPVs and IRRs exceeding the cost of capital. Project B is discarded because of a positive NPV but an IRR lower than the cost of capital. Project C is rejected, as it has a negative NPV and an IRR below the cost of capital. The assignment also includes sensitivity analysis, discussing the impact of cost increases on Project C's viability. The document includes detailed calculations, discount factors, and discounted cash flows for each project, along with a justification for the investment decisions. The analysis also considers ethical, moral, social issues, and the riskiness of the projects.

STAR SYSTEM, INC. 1
Star system, Inc.
By
Author’s Name
Institution’s Affiliation
Date of Submission
Course

STAR SYSTEM, INC. 2
Star system, Inc.
NPV = ∑ {Net Period Cash Flow/ (1+R) ^T} - Initial Investment, PVIFA = [1-(1+r) ^-n]/r
(Arshad, 2012)
The NPV for proposal A is $102,227 and the IRR is 11%.
The NPV for proposal B is $323,355 and the IRR is 13%.
The NPV for proposal C is $ -31,588.81 and the IRR is 6%.
The NPV for proposal D is $ 338,378 and the IRR is 17%.
The NPV for proposal A is constructive and the IRR is above cost of capital; for that reason,
project has to be accepted.
The NPV of proposal B is unconstructive and IRR is below cost of capital; thus, project has to be
discarded.
The NPV for proposal C is unconstructive and IRR is less than cost of capital; therefore, project
has to be rejected.
The NPV for proposal D is constructive and IRR is higher than cost of capital; for that reason,
project has to be accepted.
Justification
Project C is supposed to be discarded. And if the cost increases 3000,000 at that moment also it
must not be accepted since it might decrease the NPV further.
PROJECT A

STAR SYSTEM, INC. 3
NPV= 400,000 * PVIFA(10%,10) - 2,355,600 = 400,000 * (1-(1+0.1)^-10)/0.1 - 2,355,600
= 400,000*6.144567 - 2,355,600 = $102,227
Discount
rate
10%
PROPOSA
L A
Year CF
Discount
Factor
Discounte
d CF
NPV IRR
A B
C=0.9090^
A
D=B*C
Total
of D
0
$(2,355,60
0)
1
$
(2,355,60
0)
$
102,22
7
11.00
%
IRR(valu
es in
column
B)
1
$
400,000
0.90909090
9
$
363,636
2
$
400,000
0.82644628
1
$
330,579
3 $ 0.75131480 $

STAR SYSTEM, INC. 4
400,000 1 300,526
4
$
400,000
0.68301345
5
$
273,205
5
$
400,000
0.62092132
3
$
248,369
6
$
400,000
0.56447393
$
225,790
7
$
400,000
0.51315811
8
$
205,263
8
$
400,000
0.46650738
$
186,603
9
$
400,000
0.42409761
8
$
169,639
10
$
400,000
0.38554328
9
$
154,217
PROJECT B
NPV= 450,000 * PVIFA(10%,10) - 2,441,700 = 450,000 * (1-(1+0.1)^-10)/0.1 - 2,441,700

STAR SYSTEM, INC. 5
= 450,000*6.144567 - 2,441,700 =$323,355
IRR=13%
Discount
rate
10%
PROPOSA
L B
Year CF
Discount
Factor
Discounte
d CF
NPV IRR
A B
C=0.9090^
A
D=B*C
Total
of D
0
$(2,441,70
0)
1
$
(2,441,70
0)
$
323,35
5
13.00
%
IRR(valu
es in
column
B)
1
$
450,000
0.90909090
9
$
409,091
2
$
450,000
0.82644628
1
$
371,901
3 $ 0.75131480 $

STAR SYSTEM, INC. 6
450,000 1 338,092
4
$
450,000
0.68301345
5
$
307,356
5
$
450,000
0.62092132
3
$
279,415
6
$
450,000
0.56447393
$
254,013
7
$
450,000
0.51315811
8
$
230,921
8
$
450,000
0.46650738
$
209,928
9
$
450,000
0.42409761
8
$
190,844
10
$
450,000
0.38554328
9
$
173,494

STAR SYSTEM, INC. 7
PROJECT C
NPV= 15,000 * (10%,15) - 145,680 = 15,000 * (1-(1+0.1)^-15)/0.1 - 145,680
=15,000*7.60608 - 145,680= - 31,588.81
IRR = 6%
Discount
rate
10%
PROPOSA
L C
Year CF
Discount
Factor
Discounted
CF
NPV IRR
A B C=0.9090^A D=B*C
Total of
D
0
$
(145,680)
1 $(145,680)
$
(31,589)
6.00%
IRR(values
in column
B)
1
$
15,000
0.909090909 $ 13,636
2
$
15,000
0.826446281 $ 12,397
3
$
0.751314801 $ 11,270

STAR SYSTEM, INC. 8
PROJECT D
NPV= 300,000 * PVIFA(10%,8) - 1,262,1000 = 300,000 * (1-(1+0.1)^-8)/0.1 - 1,262,1000
= 300,000*5.334926 - 145,680
= $338,378
IRR=17%
Discount
rate
10%
PROPOSA
L B
Year CF
Discount
Factor
Discounte
d CF
NPV IRR

STAR SYSTEM, INC. 9
A B
C=0.9090^
A
D=B*C
Total
of D
0
$
(1,262,100
)
1
$
(1,262,100
)
$
338,37
8
17.00
%
IRR(value
s in
column B)
1
$
300,000
0.90909090
9
$ 272,727
2
$
300,000
0.82644628
1
$ 247,934
3
$
300,000
0.75131480
1
$ 225,394
4
$
300,000
0.68301345
5
$ 204,904
5
$
300,000
0.62092132
3
$ 186,276
6
$
300,000
0.56447393 $ 169,342
7
$
300,000
0.51315811
8
$ 153,947

STAR SYSTEM, INC. 10
8
$
300,000
0.46650738 $ 139,952
There are at all times other features which are significant to think about (Misawa, 2010).
These factors are how the project performs on ethical issues, moral issues in addition to social
issues and riskiness of that project. For instance, proposal C is evidently environmentally good
while proposal D is riskier since its success relies on others and might be dropped.

STAR SYSTEM, INC. 11
References
Arshad, A., 2012. Net present value is better than internal rate of return. Interdisciplinary journal
of contemporary research in business, 4(8), pp.211-219.
Misawa, T., 2010. Simplification of utility indifference net present value method.