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

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

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

d. Find the crossover rate. Briefly explain its importance.

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

Answer 1