The Light Blue Bedding Company is considering two new products for addition to its existing offerings....

The Light Blue Bedding Company is considering two new products for addition to its existing offerings. The products are considered mutually exclusive, since they appeal to the same target market. The projected cash flow streams are below.

YearProduct AProduct B

0-$17,000-$17,000

18,0002,000

27,0005,000

35,0009,000

43,0009,500

a. Calculate the internal rate of return for each project.

b. Calculate the NPV for each project at 0, 5, 10, 15, 20, 25, and 30%. Use your results to plot the NPV profile graphs. Be sure to identify the IRR for each project on the graph.

c. If the firm’s WACC is 8%, which product is preferable?

d. If the firm’s WACC is 14%, which product is preferable?

e. Calculate the crossover rate, and explain in words what it represents.

Solutions

Expert Solution

mutually exclusive means only one we have to choose between them
c)If firm WACC is 8% prefer product B
d)if firm WACC is 14% prefer product A
e)Cross over rate is rate at which the cash flow difference between the projects is calculated and IRR is found for this. The 12.18% and it is the cost of capital at which the net present value of one projects cross the other.

jeff jeffy answered 1 year ago

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