Sky Fly, Inc is a fast growing drone manufacturer. The annual rate of return of Sky Fly's stock has been 20% over the past few years.

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Sky Fly, Inc is a fast growing drone manufacturer. The annual rate of return of Sky Fly’s stock has been 20% over the past few years. Company managers believe 20% is a good estimate for the firms’ cost of capital. Sky Fly’s CEO, Dane Cooper, believes the company needs to continue to invest in projects that offer the highest possible returns. Currently, the company is reviewing two separate projects. Project E involves expanding production capacity. Project I involves introducing one of the firms’ drones into a new market. The following table shows the projected cash flows for each project.

Year                                                 E                                                     I

0                                               -3,500,000                                       -500,000

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1                                                1,500,000                                        250,000

2                                                2,000,000                                        350,000

3                                                2,500,000                                        375,000

4                                                2,750,000                                        425,000

Discuss

  • Calculate the NPV, IRR, and PI for both projects.
  • Rank the projects based on their NPV, IRR, and PI.
  • The firm can only afford to take on one investment.
    • Which project will the CEO likely favor?
    • What do you think the company should do?

Explain your answers.

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