Question
In: Finance
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 2 years agoRelated Solutions
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