Question
In: Finance
Consider that Luxio has identified the following two mutually exclusive projects: Cash Flow (A) Year 0.........-34000...
Consider that Luxio has identified the following two mutually exclusive projects:
Cash Flow (A)
Year 0.........-34000
Year 1..........16500
Year 2.........14000
Year 3.........10000
Year 4..........6000
Cash Flow (B)
Year 0........-$34,000
Year 1...........5,000
Year 2.........10,000
Year 3........18,000
Year 4........19,000
The required return is 11%.
Question: Over what range of discount rates would the company choose project A? Explain.
P.S. I have calculated the IRR and NPV for 11% required return.
Project A: IRR= 16.60% NPV= $ 3,491.88
Project B: IRR= 15.72% NPV= $ 4,298.06
I have also calculated the crossover rate at which the company will be indifferent between the two projects: 13.75%.
I'm having a hard time explaining why the company will choose project A if the discount rate is above 13.75?
Solutions
Expert Solution
SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE
| remember the rule : | ||||
| IF COST OF CAPITAL IS GREATER THAN CROSSOVER RATE, BOTH NPV AND IRR LEAD TO SAME PROJECT SELECTION |
jeff jeffy answered 1 year agoRelated Solutions
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$...
Consider the following two mutually exclusive
projects:
Year
Cash Flow (A)
Cash Flow (B)
0
–$
364,000
–$
52,000
1
46,000
25,000
2
68,000
22,000
3
68,000
21,500
4
458,000
17,500
Whichever project you choose, if any, you require a return of 11
percent on your investment.
a-1. What is the payback period for each project?
(Do not round intermediate calculations and round your
answers to 2 decimal places, e.g., 32.16.)
a-2. If you apply the payback criterion, which...
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0...
Consider the following two mutually exclusive projects:
Year
Cash Flow (A)
Cash Flow (B)
0
–$199,124
–$15,993
1
25,800
5,691
2
51,000
8,855
3
54,000
13,391
4
416,000
8,695
Whichever project you choose, if any, you require a 6 percent
return on your investment.
a. What is the payback period for Project
A?
b. What is the payback period for Project
B?
c. What is the discounted...
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0...
Consider the following two mutually exclusive projects:
Year
Cash Flow
(A)
Cash Flow
(B)
0
–$
360,000
–$
45,000
1
35,000
23,000
2
55,000
21,000
3
55,000
18,500
4
430,000
13,600
Whichever project you choose, if any, you require a 14 percent
return on your investment.
a-1
What is the payback period for each project? (Do not
round intermediate calculations and round your answers to 2 decimal
places, e.g., 32.16.)
Payback period
Project A
years
Project...
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0...
Consider the following two mutually exclusive projects:
Year
Cash Flow (A)
Cash Flow (B)
0
–$260,730
–$15,011
1
27,800
4,942
2
56,000
8,023
3
55,000
13,040
4
426,000
9,138
Whichever project you choose, if any, you require a 6 percent
return on your investment.
a. What is the payback period for Project
A?
b. What is the payback period for Project
B?
c. What is the discounted...
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0...
Consider the following two
mutually exclusive projects:
Year
Cash Flow
(A)
Cash Flow
(B)
0
–$251,835
–$15,247
1
25,100
4,828
2
55,000
8,358
3
50,000
13,472
4
385,000
8,102
Whichever project you choose, if
any, you require a 6 percent return on your investment.
a.What is the discounted payback period for Project A?
b.What
is the discounted payback period for Project B?
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0...
Consider the following two
mutually exclusive projects:
Year
Cash Flow
(A)
Cash Flow
(B)
0
–$251,835
–$15,247
1
25,100
4,828
2
55,000
8,358
3
50,000
13,472
4
385,000
8,102
Whichever project you choose, if
any, you require a 6 percent return on your investment.
a.What is the discounted payback period for Project A?
b.What
is the discounted payback period for Project B?
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0...
Consider the following two mutually exclusive projects:
Year
Cash Flow (A)
Cash Flow (B)
0
–$216,888
–$15,026
1
26,900
4,016
2
51,000
8,270
3
54,000
13,423
4
420,000
9,668
Whichever project you choose, if any, you require a 6 percent
return on your investment.
a. What is the payback period for Project
A?
b. What is the payback period for Project
B?
c. What is the discounted...
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0...
Consider the following two
mutually exclusive projects:
Year
Cash Flow
(A)
Cash Flow
(B)
0
–$
345,000
–$
48,500
1
50,000
24,500
2
70,000
22,500
3
70,000
20,000
4
445,000
15,100
Whichever project you choose, if
any, you require a 14 percent return on your investment.
a-1
What is the payback period for each project? (Do not
round intermediate calculations and round your answers to 2 decimal
places, e.g., 32.16.)
Payback
period
Project A
years
Project...
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$...
Consider the following two mutually exclusive projects:
Year
Cash Flow (A)
Cash Flow (B)
0
–$
430,000
–$
74,000
1
78,000
32,000
2
98,000
30,000
3
73,000
27,500
4
448,000
22,600
Whichever project you choose, if any, you require a 15% return
on your investment.
a-1. What is the payback period for each
project? (Round the final answers to 2 decimal
places.)
Payback Period
Project A
years
Project B
years
a-2. If you apply the payback criterion, which
investment will...
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 $...
Consider the following two mutually exclusive projects:
Year
Cash Flow (A)
Cash Flow (B)
0
$
-450,000
$
-80,000
1
90,000
34,000
2
110,000
32,000
3
75,000
29,500
4
450,000
24,600
Whichever project you choose, if any, you require a 15% return
on your investment.
a-1. What is the payback period for each
project? (Round the final answers to 2 decimal
places.)
Payback Period
Project A
years
Project B
years
b-1. What is the discounted payback period for
each project?...
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