Question

A, B, and C are the main ones I'm not sure about.

NPV and IRR Analysis Cummings Products is considering two mutually exclusive investments whose expected net cash flows are as follows: Expected Net Cash Flows Year Project A -$400 -528 -219 Project B -$650 210 210 -150 210 You A WN - 1,100 210 210 820 990 210 -325 210 a. Construct NPV profiles for Projects A and B. b. What is each project's IRR? c. If each project's 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? d. What is each project's MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B's life.) e. What is the crossover rate, and what is its significance? T.. .. nice.....

Answer 1

PFB solution.. rate positively ..

к L A В E Н K M Expected net cash flows Project A Project B (S400) ($528) ($219) ($150) $1,100 $820 10 Time (S650) $210 11 12 1 $210 $210 $210 $210 $210 13 2 14 3 15 4 16 $990 17 6 ($325) 18 7 $210 19 Ans a) 20 Before we can graph the NPV profiles for these projects, we must create a data table of project NPV relative to differing costs of 21 capital 22 23 Project A Project B $1,400.00 24 $1,288.00 $1,085.60 $820.00 25 0% $1,200.00 26 2% $709.12 $1,000.00 $906.18 $610.43 27 4% $522.30 28 6% $746.86 $800.00 $605.12 $443.34 29 8% 30 10% $478.83 $372.37 $600.00 Project A $366.13 $265.40 $308.39 31 12% 32 14% $250.54 Project B $400.00 $198.10 $150.42 $106.96 $67.26 $30.89 ($2.50) ($201.89) ($33.23) ($244.71) ($61.56) $175.25 33 16% $94,46 34 18% $200.00 35 20% $21.98 $0.00 (S43.14) ($101.69) (S154.40) 36 22% 0.3 0.1 0.2 0.4 37 24% ($200.00) 38 26% 39 28% ($400.00) 40 30% 41

C к L A В Е G Н J M O 42 b. What is each project's IRR? 43 We find the internal rate of return with Excel's IRR function: 44 45 IRRA= Note in the graph above that the X-axis intercepts are equal to the two projects' IRRS 20.65% 46 IRR B 25.84% 47 48 49 C If you were told that each project's cost of capital was 10 percent, which project should be selected? If the cost 50 of capital was 17 percent, what would be the proper choice? 51 52aa 12% cost of capital a 18% cost of capital 53 54 WACC = 10% WACC 17% 55 S133.76 56 NPV A $478.83 NPV A 57 $372.37 $173.70 58 NPV B = NPV B 59 60 At a cost of capital of 12%, Project A should be selected. However, if the cost of capital rises to 17%, then the choice is 61 reversed, and Project B should be accepted. 62 63 d. What is each project's MIRR at a cost of capital of 10 percent? At r= 17%? 64 65 a 10% cost of capital a 17% cost of capital 66 67 MIRR 14.91% MIRR MIRR B 18.76% 21.03% 68 MIRR 69 17.35% в - 70

В c D Е F G Н J к L M N 59 60 At a cost of capital of 12%, Project A should be selected. However, if the cost of capital rises to 17%, then the choice is 61 reversed, and Project B should be accepted 62 63 d. What is each project's MIRR at a cost of capital of 10 percent? At r= 17%? 64 65 a 17% cost of capital a a 10% cost of capital 66 67 14.91% 18.76% MIRRA MIRRA= 68 MIRR B MIRR B 69 17.35% 21.03% 70 71 e. What is the crossover rate, and what is its significance? 72 73 Cash flow differential $250 ($738) ($429) ($360) $890 74 Time 75 76 1 14.76% 77 2 Crossover rate = 78 3 79 The crossover rate represents the cost of capital at which the two projects have the same net present value. In this scenario, that value, at a cost of capital of 14.76%, is: $610 $780 80 5 81 6 $230 82 7 ($535) 83 84 85 86 87 88 89 90