Question

1. [Ch 11] Chapman Corp is planning to invest in two mutually exclusive projects: expanding the parking structures and building a new swimming pool. The cash flows for the two projects are given below. IRR 0 -200 -200 1 25 200 Parking Structure 2 100 100 3 125 50 4 200 TRR 31.20% Swimming Pool 36.60% A) Define mutually exclusive projects. B) Find the NPV for these two projects at the following discount rates 0%, 10%, 25% and 35%. C) Carefully and neatly plot the NPV profile (i.e., plot NPV vs. discount rates in part B) AND explain which project should be chosen at each discount rate (0%, 10%, 15%, and 24%) and why? Note: I suggest you use MS Excel to produce the plot. Also, please be sure to label the x- and y-axes as well as identify the points at which the curves cross the x- and y-axes (i.e., write down the values/numbers at which the curves cross both axes).

Answer 1

A) Mutually Exclusive Projects

Mutually exclusive projects are projects which are not independent projects and selection of one project from mutually exclusive projects automatically rejects all others projects in the analysis.

B) & C)

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A B F G H I 1 Year 0 Parking Structure -2001 25. 100 125 200 Swimming Pool -200 200 100 50 2 8 9 B) Interest rate 10 11 0% 10% 25% 35% NPV Parking Structure Swimming Pool $250.00 $150.00 $135.89 $102.03 $29.92 $49.60 -$15.59 $23.34 14 15 16 17 C) NPV vs. Discount rate $300.00 $250.00 $200.00 NPV $150.00 $100.00 $50.00 $0.00 5% 10% 15% 25% 30% 35% 40% -$50.00 0% 20% Discount rate Parking Structure Swimming Pool NPV Analysis Rule: Project with higher NPV should be selected. 34 36 Discount rate 0% 10% 15% 24% Preferred Project Parking structure Parking structure Parking structure Swimming Pool

Cell reference -

A B E F G H Year Parking Structure Swimming Pool lo -200 |-200 25 1 200 100 50 125 200 Interest rate 11 12 13 NPV Parking Structure Swimming Pool ENPV(B11,$C$4:$C$7)+$C$3 =NPV(B11,$D$4:$D$6)+$D$3 =NPV(B12, $C$4:$C$7)+$C$3 =NPV(B12, $D$4:$D$6)+$D$3 =NPV(B13, $C$4:$C$7)+$C$3 =NPV(B13, $D$4:$D$6)+$D$3 =NPV(B14,$C$4:$C$7)+$C$3 =NPV(B14, $D$4:$D$6)+$D$3 0.1 0.25 0.35 16 C) NPV vs. Discount rate $300.00 $250.00 $200.00 $150.00 NPV $100.00 $50.00 $0.00 0% 5% 10% 15% 25% 30% 35% 40% 20% Discount rate Parking Structure Swimming Pool NPV Analysis Rule: Project with higher NPV should be selected. Discount rate 35 36 37 38 39 0.1 0.15 0.24 Preferred Project Parking structure Parking structure Parking structure Swimming Pool

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.