Question

NPV and IRR Analysis Cummings Products Company is considering two mutually exclusive investments whose expected net cash flows are as follows: EXPECTED NET CASH FLOWS Year Project A Project B 0 -$400 -$650 1 -528 210 2 -219 210 3 -150 210 4 1,100 210 5 820 210 6 990 210 7 -325 210 What is each project's IRR? Do not round intermediate calculations. Round your answers to two decimal places. Project A: % Project B: % Calculate the two projects' NPVs, if each project's cost of capital was 10%. Do not round intermediate calculations. Round your answers to the nearest cent. Project A: $ Project B: $ Which project, if either, should be selected? should be selected. Calculate the two projects' NPVs, if each project's cost of capital was 17%. Do not round intermediate calculations. Round your answers to the nearest cent. Project A: $ Project B: $ What would be the proper choice? is the proper choice. What is each project's MIRR at a cost of capital of 10%? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answers to two decimal places. Project A: % Project B: % What is each project's MIRR at a cost of capital of 17%? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answers to two decimal places. Project A: % Project B: % What is the crossover rate? Do not round intermediate calculations. Round your answer to two decimal places. % What is its significance? I. The crossover rate has no significance in capital budgeting analysis. II. If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection. III. If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections. Check My Work (1 remaining) Icon Key Previous Question 6 of 7 NextProblem 12-13 (NPV and IRR Analysis)

Answer 1

Machines	A			B
Year	cash flow			cash flow
0	-400			-650
1	-528			210
2	-219			210
3	-150			210
4	1100			210
5	820			210
6	990			210
7	325			210
IRR = Using IRR function in MS excel =irr(cell reference cash flow year 0: cell reference year 7)	25.22%		IRR = Using IRR function in MS excel =irr(cell reference cash flow year 0: cell reference year 7)	25.84%
NPV at 10% = Using NPV function in MS excel =npv(rate, cash flow year 0, cash flow year 1, cash flow year 2………………………………….cash flow year 7)	NPV(10%,-400,-528,-219,-150,1100,820,990,325)	$738.53	NPV = Using NPV function in MS excel =npv(rate, cash flow year 0, cash flow year 1, cash flow year 2………………………………….cash flow year 7)	$338.52	$338.52
On the basis of NPV Project A should be selected
NPV at 17% = Using NPV function in MS excel =npv(rate, cash flow year 0, cash flow year 1, cash flow year 2………………………………….cash flow year 7)	NPV(17%,-400,-528,-219,-150,1100,820,990,325)	$299.43	NPV = Using NPV function in MS excel =npv(rate, cash flow year 0, cash flow year 1, cash flow year 2………………………………….cash flow year 7)	NPV(17%,-650,210,210,210,210,210,210,210)	$148.46
On the basis of NPV Project A should be selected
MIRR at 10% = Using MIRR function in MS excel =MIRR(cell reference cash flows,finance rate,reinvestment rate)	(cell reference Year 0 cash flow:cell reference year 7 cash flow,10%,10%)	18.58%	MIRR = Using MIRR function in MS excel =MIRR(cell reference cash flows,finance rate,reinvestment rate)	(cell reference Year 0 cash flow:cell reference year 7 cash flow,10%,10%)	17.35%
MIRR at 17% = Using MIRR function in MS excel =MIRR(cell reference cash flows,finance rate,reinvestment rate)	(cell reference Year 0 cash flow:cell reference year 7 cash flow,17%,17%)	29.77%	MIRR = Using MIRR function in MS excel =MIRR(cell reference cash flows,finance rate,reinvestment rate)	(cell reference Year 0 cash flow:cell reference year 7 cash flow,10%,10%)	21.03%
Year	A	B
	cash flow	cash flow	incremental cash flow
0	-400	-650	-250
1	-528	210	738
2	-219	210	429
3	-150	210	360
4	1100	210	-890
5	820	210	-610
6	990	210	-780
7	325	210	-115
crossover rate = Using IRR function in MS excel =irr(cell reference incremntal cash flow year 0: cell reference year 7 incremental cash flow)			24.64%
III. If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections.