Question
In: Finance
8. The (net) cash flows of project C and D are shown below: Net Cash Flow...
8. The (net) cash flows of project C and D are shown below: Net Cash Flow ($) Year Project C Project D 0 -2,000 -1,000 1 3,000 650 2 125 1,500 a. Find the crossover rates. (1.5 point) b. The cost of capital is 12 percent. If C and D are mutually exclusive, which project should be accepted? Why? (0.5 point)
Solutions
Expert Solution
| Answer a | ||||||
| Calculation of crossover rate | ||||||
| The crossover rate is the point at which the two projects achieve the same net present value. | ||||||
| Year | Project C Cash flow | Project D Cash flow | Diiference | |||
| a | b | c | b-c | |||
| 0 | -$2,000.00 | -$1,000.00 | -$1,000.00 | |||
| 1 | $3,000.00 | $650.00 | $2,350.00 | |||
| 2 | $125.00 | $1,500.00 | -$1,375.00 | |||
| Aply IRR formula to the difference to get crossover rate. | ||||||
| Crossover rate = | 10.00% | |||||
| Answer b | ||||||
| Calculation of NPV of projects | ||||||
| Year | Discount factor @ 12% | Project C | Project D | |||
| Cash flow | Present Value | Cash flow | Present Value | |||
| 0 | 1 | -$2,000.00 | -$2,000.00 | -$1,000.00 | -$1,000.00 | |
| 1 | 0.892857143 | $3,000.00 | $2,678.57 | $650.00 | $580.36 | |
| 2 | 0.797193878 | $125.00 | $99.65 | $1,500.00 | $1,195.79 | |
| NPV of projects | $778.22 | $776.15 | ||||
| NPV of project C is higher , hence Project C should be accepted. | ||||||
jeff jeffy answered 8 months agoRelated Solutions
The net cash flows for project X, Y and Z are shown below. Each project has...
The net cash flows for project X, Y and Z are shown below. Each
project has an initial cost of $100, and the company uses a 10%
cost of capital (i.e., the discount rate = 10%) for each project.
Which project is most sensitive to the change of the cost of
capital?
End of Year
Net Cash Flow From Project
X
Y
Z
1
$110
0
0
2
0
$121
0
3
0
0
$133.1
X
Y
Z
All the...
Sigma Company is examining the cash flows of the capital budgeting project shown below. The project...
Sigma Company is examining the cash flows of the capital
budgeting project shown below. The project is expected to cost
$400,000. Sigma has a required rate of return of 12%, and a maximum
acceptable payback period of 3 years.
0
1
2
3
4
5
($400,000)
$150,000
$150,000
$200,000
$100,000
$100,000
a. Calculate the NPV of the project. Based on the NPV analysis,
should Sigma accept the project? Why or why not?
b. Calculate the payback period of the...
Suppose your firm is considering investing in a project with the cash flows shown below, that...
Suppose your firm is considering investing in a project with the
cash flows shown below, that the required rate of return on
projects of this risk class is 8 percent.
Time:
0
1
2
3
4
5
6
Cash flow:
–$8,600
$1,080
$2,280
$1,480
$1,480
$1,280
$1,080
Use the IRR decision rule to evaluate this project.
(Negative amount should be indicated by a minus sign. Round
your answer to 2 decimal places.)
IRR%=
Should it be accepted or rejected?
Suppose your firm is considering investing in a project with the cash flows shown below, that...
Suppose your firm is
considering investing in a project with the cash flows shown below,
that the required rate of return on projects of this risk class is
9 percent, and that the maximum allowable payback and discounted
payback statistics for the project are 2.0 and 3.0 years,
respectively.
Time:
0
1
2
3
4
5
6
Cash flow:
−$7,600
$1,190
$2,390
$1,590
$1,590
$1,390
$1,190
Use the NPV decision rule to evaluate this project.
(Negative amount should be indicated...
Suppose your firm is considering investing in a project with the cash flows shown below, that...
Suppose your firm is considering investing in a project with the
cash flows shown below, that the required rate of return on
projects of this risk class is 12 percent, and that the maximum
allowable payback and discounted payback statistic for the project
are 2 and 3 years, respectively.
Time
0
1
2
3
4
5
6
Cash Flow
-1,150
30
570
770
770
370
770
Use the discounted payback decision rule to evaluate this project;
should it be accepted...
Suppose your firm is considering investing in a project with the cash flows shown below, that...
Suppose your firm is considering investing in a project with the
cash flows shown below, that the required rate of return on
projects of this risk class is 9 percent, and that the maximum
allowable payback and discounted payback statistics for the project
are 3.5 and 4.5 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow
–$5,200 $1,250 $2,450 $1,650 $1,570 $1,450 $1,250 Use the payback
decision rule to evaluate this project. (Round your answer to 2...
Suppose your firm is considering investing in a project with the cash flows shown below, that...
Suppose your firm is considering investing in a project with the
cash flows shown below, that the required rate of return on
projects of this risk class is 10 percent, and that the maximum
allowable payback and discounted payback statistic for the project
are 2 and 3 years, respectively.
Time
0
1
2
3
4
5
6
Cash Flow
-1,050
150
450
650
650
250
650
Use the payback decision rule to evaluate this project; should it
be accepted or...
Suppose your firm is considering investing in a project with the cash flows shown below, that...
Suppose your firm is considering investing in a project with the
cash flows shown below, that the required rate of return on
projects of this risk class is 8 percent, and that the maximum
allowable payback and discounted payback statistics for the project
are 3.5 and 4.5 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow:
?$5,000 $1,200 $2,400 $1,600 $1,600 $1,400 $1,200 Use the
discounted payback decision rule to evaluate this project.
Suppose your firm is considering investing in a project with the cash flows shown below, that...
Suppose your firm is considering investing in a project with the
cash flows shown below, that the required rate of return on
projects of this risk class is 7 percent, and that the maximum
allowable payback and discounted payback statistics for the project
are 3.5 and 4.5 years, respectively.
Time: 0 1 2 3 4 5 6
Cash flow: −$5,100 $1,240 $2,440 $1,640 $1,560 $1,440 $1,240
Use the payback decision rule to evaluate this project.
How many years will it...
Suppose your firm is considering investing in a project with the cash flows shown below, that...
Suppose your firm is considering investing in a project with the
cash flows shown below, that the required rate of return on
projects of this risk class is 11 percent, and that the maximum
allowable payback and discounted payback statistic for the project
are 2 and 3 years, respectively.
Time
0
1
2
3
4
5
6
Cash Flow
-1,140
40
560
760
760
360
760
Use the payback decision rule to evaluate this project; should it
be accepted or...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Reorganize the following list of cations in the order of strongest to the weakest potential for...
- Macropoland is currently experiencing a recession--consumption and investment are very sluggish, and unemployment is quite high...
- Respond to the following: Explain properties of atomic nuclei. Explain nuclear stability. In your own words,...
- On June 1, Haimes Company spent $200,000 to purchase 250,000 coffee mugs to sell at its...
- Addiction affects a wide variety of people regardless of race, economic status, or age. However, the...
- Exercise 2A-7 Crane Corporation incurred the following transactions. 1. Purchased raw materials on account $47,000. 2....
- Assume that 80% of people are left-handed. If we select 5 people at random, find the...
ADVERTISEMENT