Question

NPV and IRR Analysis

Cummings Products Company is considering two mutually exclusive investments whose expected net cash flows are as follows:

	EXPECTED NET CASH FLOWS
Year	Project A		Project B
0	-$340		-$630
1	-528		210
2	-219		210
3	-150		210
4	1,100		210
5	820		210
6	990		210
7	-325		210

   

1. What is each project's IRR? Do not round intermediate calculations. Round your answers to two decimal places.

   Project A:   %

   Project B:   %

2. Calculate the two projects' NPVs, if each project's cost of capital was 11%. Do not round intermediate calculations. Round your answers to the nearest cent.

   Project A: $  

   Project B: $  

   Which project, if either, should be selected?

   -Select-Project AProject BItem 6 should be selected.

   Calculate the two projects' NPVs, if each project's cost of capital was 18%. Do not round intermediate calculations. Round your answers to the nearest cent.

   Project A: $  

   Project B: $  

   What would be the proper choice?

   -Select-Project AProject BItem 9 is the proper choice.

3. What is each project's MIRR at a cost of capital of 11%? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answers to two decimal places.

   Project A:   %

   Project B:   %

   What is each project's MIRR at a cost of capital of 18%? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answers to two decimal places.

   Project A:   %

   Project B:   %

4. What is the crossover rate? Do not round intermediate calculations. Round your answer to two decimal places.

      %

   What is its significance?

   I. The crossover rate has no significance in capital budgeting analysis.
   II. If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection.
   III. If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections.
   -Select-IIIIIIItem 15

Answer 1