Question

Diamond City is considering two mutually exclusive investment projects. The cost of capital for these projects is r. The projects’ expected net cash flows are as follows: Year Project A Project B

0 -42,000 -42,000

1 24,000 16,000

2 20,000 18,000

3 16,000 22,000

4 12,000 26,000

a. Calculate each project’s payback (PB) period if r = 10% (up to 2 decimal places). Which project should be accepted?

b. Calculate each project’s discounted payback (DPB) period if r = 10% (up to 2 decimal places). Which project should be accepted?

c. Construct NPV profiles (Y = NPV; X = r; two curves on one chart) for Projects A and B, using r = 0%, 4%, 8%, 10%, 12%, 16%, 20%, 22%, 24%, 28%, 32%, 36%, and 48%. Show calculations and an Excel chart.

d. Calculate each project’s IRR. Which project should be accepted if r = 10%?

e. If r = 10%, which project should be selected under the NPV method?

f. If r = 20%, which project should be selected under the NPV method?

g. Calculate each project’s PI at r = 10% and r = 20%, respectively. Under the PI method, which project should be selected?

h. Find the crossover rate. Briefly explain its importance. i. Calculate each project’s MIRR. Which project should be accepted if r = 10%?

Answer 1