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Projects A and B are mutually exclusive projects. Project A requires an initial investment today of...

Projects A and B are mutually exclusive projects. Project A requires an initial investment today of $300 and generates expected cash flows of $100 at the end of each of the next 5 years. Project B requires an initial investment today of $130 and generates expected cash flows of $55 at the end of each of the next 5 years. a. If you plotted the NPV profiles, what would be the "crossover rate" in the graph? (Note you are not asked to actually plot NPV profiles). Please make sure your supporting work shows either algebra or financial calculator input limited to the five financial time value of money keys (N, I or I/YR depending on calculator model, PV, PMT, and FV) - b. What is the NPV of project A if the cost of capital is 14.0%? Please make sure your supporting work shows either algebra or financial calculator input limited to the five financial time value of money keys (N, I or I/YR depending on calculator model, PV, PMT, and FV)

Solutions

Expert Solution

1.

Crossover rate is the rate which NPV of two mutually exclusive project is equal. Crossover rate for both project A and Project B is calculated in excel and screen shot provided below:

Crossover rate is 10.135%. NPV for both project at this rate is $77..77.

b.

NPV of project A at 14% discount rate is calculated in excel and screen shot provided below:

NPV of project A at 14% discount rate is $43.31

jeff jeffy answered 1 year ago
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