Question

1. The large furniture retailer “Sofa So Good” is evaluating two mutually exclusive projects:

       NPV versus IRR. Consider the following projects, where the firms may only choose one not both:

      

       The firm’s cost of capital/required return equals 9%

       PLEASE NOTE: The firm’s cost of capital, K, acts as a hurdle rate, and is based on the costs involved in financing other firm projects. The Cost of capital allows us to decide to accept or reject an investment, using IRR, and also allows us to use it as the discount rate, R, in NPV calculations.

Years	Cash Flow Project X	Cash Flow Project Y	The differential (X - Y) or (Y – X)
0	-$69,000	-$69,000	?
1	$13,000	$29,000	?
2	$33,000	$24,000	?
3	$38,000	$27,000	?

Questions for #3:

1. What would be the Internal Rate of Return for each investment, X and Y.?
2. What would be the NPV’s of each project, if the cost of capital is 9% for the firm, “Sofa So Good”?
3.    What is the crossover point, otherwise known as the discount crossover rate, where both projects cross??? (Remember to subtract X – Y cash flows or Y-X, and then set series equal to zero, and solve for IRR)
4. Please Include an NPV Profile for the projects (see Figure 8.7 on page 253 in textbook and study guide/practice exam), including calculating the NPVs for a range of the discount rates, 0%, 5%, 10%, 15%, 20%, and 25% - this allows for more accurate plotting of the profile.
5.    Finally, which project should you accept and when (under what circumstances)?

      

Answer 1