What is each projectís IRR? (b) If each projectís cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice?

Use the following information for Questions 1 through 3:

Assume you are presented with the following mutually exclusive investments whose expected net cash flows are as follows:

EXPECTED NET CASH FLOWS:

Year                           Project A                       ProjectB

0                                -$400                          -$650

1                                  -528                              210

2                                   -219                             210

3                                   -150                             210

4                                  1,100                              210

5                                      820                             210

6                                      990                             210

7                                    -325                             210 

 

1. (a)  What is each projectís IRR? (b) If each projectís cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice?

2. (a)  What is each projectís MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project Bís life.)

3. What is the crossover rate, and what is its significance?

 

Use the following information for Question 4:

The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for a new manufacturing process:

Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the estimated salvage values. Porterís cost of capital for an average-risk project is 10%.

Net After-Tax Cash Flows 

Year                     P = 0.2                 P = 0.6                 P = 0.2

0                      -$100,000            -$100,000            -$100,000

1                            20,000                  30,000                  40,000

2                            20,000                  30,000                   40,000

3                            20,000                  30,000                   40,000

4                            20,000                  30,000                   40,000

5                            20,000                  30,000                   40,000

5*                                   0                  20,000                   30,000

 

4. Assume that the project has average risk. Find the projectís expected NPV. (Hint: Use expected values for the net cash flow in each year.)

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