a) What is each project’s IRR? b) If each project’s cost of capital were 10%, wh

Question

a) What is each project’s IRR?

b) If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice?

c) What is each project’s MIRR at the cost of capital of 10%? At 17%?     (Hint: Consider Period 7 as the end of Project B’s life.)

d) What is the crossover rate, and what is its significance?

Please show all equations and answers in Excel format.

Assume you are given these mutually exclusive investments with the expected net cash flows as in the table Year Project A -400.00 528.00 219.00 250.00 1100.00 820.00 990.00 325.00 Project B -670 210 210 210 210 210 210 210 2 4 7

Explanation / Answer

Ans a, b & c) is given is below table

Formula used:

IRR of A: =IRR(all project A values) ;similarly we will find for project B

NPV 0f A: =NPV(10%, all project A values from year 1 to 7) + year 0 value ; similarly we will find for project B at 10% as well as 17%

MIRR of A: =MIRR(all project A values,10%,10%); similarly we will find for project B at 10% as well as 17%

At 10% project A should be selected and at 17% project B will be selected because it has higher NPVs at this cost of capital.

Ans d)

Crossover rate is 12.315%. It is the rate at which both project are equally good since NPV is equal at this point.

Year Project A Project B 0 -400 -670 1 -528 210 2 -219 210 3 -250 210 4 1100 210 5 820 210 6 990 210 7 -325 210 IRR 19% 25% NPV at 10% 403.70 352.37 NPV at 17% 71.32 153.70 MIRR at 10% 14% 17% MIRR at 17% 18% 21%

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