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

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.

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

Next > < Previous

Related Solutions

1. There are two mutually exclusive projects. Project A requires a $600,000 initial investment and is...

1. There are two mutually exclusive projects. Project A requires a $600,000 initial investment and is expected to provide $120,000 annual net cash inflows for 6 years. Project B requires a $740,000 initial investment and is expected to provide $200,000 annual net cash inflows for 4 years. Which project should you accept according to IRR method when your cost of capital is 10%? A. Project A B. Project B C. Both D. Neither of these 2. Leveraged IRR: A. estimates...

We have two independent and mutually exclusive projects, A and B. Project A requires an initial...

We have two independent and mutually exclusive projects, A and B. Project A requires an initial investment of $1500, and will yield $800 of cash inflows for the next three years. Project B requires an initial investment of $5000, and will yield $1,500 of cash inflows for the next five years. The required return on each project is 10%. a. What are the net present values of Project A and Project B? b. What is the problem with using the...

We have two independent and mutually exclusive projects, A and B. Project A requires an initial...

We have two independent and mutually exclusive projects, A and B. Project A requires an initial investment of $1000, and will yield $500 of cash inflows for the next three years. Project B requires an initial investment of $3,500, and will yield $1,000 of cash inflows for the next five years. The required return on both projects is 10%. (13 marks total) a. What are the net present values of Project A and Project B? b. What is...

We have two independent and mutually exclusive projects, A and B. Project A requires an initial...

We have two independent and mutually exclusive projects, A and B. Project A requires an initial investment of $1500, and will yield $800 of cash inflows for the next three years. Project B requires an initial investment of $5000, and will yield $1,500 of cash inflows for the next five years. The required return on each project is 10%. (13 marks total) a. What are the net present values of Project A and Project B? b. ...

Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial investment for...

Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial investment for each project is $40,000. Project A will generate cash inflows equal to $15,625 at the end of each of the next five years; Project B will generate only one cash inflow in the amount of $79,500 at the end of the fifth year (i.e., no cash flows are generated in the first four years). The required rate of return of Ace Inc. is 10...

Projects A and B are mutually exclusive and have an initial cost of $78,000 each. Project...

Projects A and B are mutually exclusive and have an initial cost of $78,000 each. Project A provides cash inflows of $32,000 a year for three years while Project B produces a cash inflow of $44,400 a year for two years. Which project(s) should be accepted if the discount rate is 10 percent? What if the discount rate is 12.5 percent?

An entrepreneur has a choice of two mutually exclusive investment projects, Project A and Project B....

An entrepreneur has a choice of two mutually exclusive investment projects, Project A and Project B. Each lasts for one time period and the firm has no other projects. Project A will result in a cash flow of £27 million in the good state and £10 million in the bad state. Each outcome is equally likely. Project B will result in a cash flow of £34 million in the good state and zero in the bad state. Each outcome is...

A company is considering two mutually exclusive projects Adept and Boffo. Project Adept requires an initial...

A company is considering two mutually exclusive projects Adept and Boffo. Project Adept requires an initial investment of $100,000 and is expected to generate after-tax cash flows of $45,000 per year for three years. Project Boffo requires an initial investment of $150,000 and is expected to generate after-tax cash flows of $50,000 per year for four years. The appropriate discount rate is 10%. What is the crossover rate for projects Adept and Boffo? 4.06% 16.65% 12.59% 7.77%

Projects T and Q are mutually-exclusive investment alternatives, Each project requires a net investment of $20,000,...

Projects T and Q are mutually-exclusive investment alternatives, Each project requires a net investment of $20,000, followed by a series of positive net cash flows. Both projects have a useful life equal to 10 years. Project T has an NPV of $36,000 at a 0% discount rate, while project Q has an NPV of $30,000 at 0%. Furthermore, at a discount rate of 15 percent, the two projects have identical positive NPVs. Given this, which of the following statements is...

Mutually exclusive Projects Project A Project B Project C Initial cash Outlay (50,000) (60,000)...

Mutually exclusive Projects Project A Project B Project C Initial cash Outlay (50,000) (60,000) (40,000) Required Rate of Return 11% 8% 13% Cash Flows: 　　　 Inflow Year 1 10,000 30000 8,000 Inflow Year 2 15,000 50000 20,000 Inflow Year 3 20,000 5000 20,000 Inflow Year 4 25,000 5000 20,000 Inflow Year 5 30,000 2000 15,000 Step 1 Your first assignment as a financial analysis manager at Caledonia Products is to evaluate three new capital budget proposals. You have...

Subjects