Question

In: Finance

An investor has identified the following two mutually exclusive projects:    Year Cash Flow (A) Cash...

An investor has identified the following two mutually exclusive projects:

  

Year Cash Flow (A) Cash Flow (B)
0 –$39,000        –$39,000       
1 19,200        5,800       
2 14,700        12,300       
3 12,200        18,800       
4 9,200        22,800      

  

Required:
(a) What is the IRR for Project A?

  

(b) What is the IRR for Project B?

  

(c) If the required return is 9 percent, what is the NPV for Project A?

  

(d) If the required return is 9 percent, what is the NPV for Project B?

  

(e) At what discount rate would the company be indifferent between these two projects?

Solutions

Expert Solution

a.

IRR of both project is calculated in excel and screen shot provided below:

Internal rate of return of project A is 18.00% and Internal rate of return of project B is 15.77%.

c.

NPV of both project is calculated in excel and screen shot provided below:

Net Present value of project A is $6,925.53 and Net Present value of project B is $7,342.91.

e.

The discount rate at which both project is indifferent is called crossover rate. So crossover rate for both project is calculated in excel and screen shot provided below:

the crossover rate is not possible it must be at infinity.


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