Nettie Products Company is considering two mutually exclusive investments whose
ID: 2629523 • Letter: N
Question
Nettie 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
-$290
-$400
1
-387
134
2
-193
134
3
-100
134
4
600
134
5
600
134
6
850
134
7
-180
134
Construct NPV profiles for Projects A and B.
# 1.) What is each project's IRR? Round your answers to two decimal places.
Project A %
Project B %
# 2.) Calculate the two projects' NPVs, if you were told that each project's cost of capital was 14%. Round your answers to the nearest cent.
Project A $
Project B $
# 3.) Which project, if either, should be selected?
Project A or Project BItem 6
# 4.) Calculate the two projects' NPVs, if the cost of capital was 17%. Round your answers to the nearest cent.
Project A $
Project B $
# 5.) What would be the proper choice?
Project A or Project B
# 6.) What is each project's MIRR at a cost of capital of 14%? (Hint: Note that B is a 6-year project.) Round your answers to two decimal places.
Project A %
Project B %
# 7. ) What is each project's MIRR at a cost of capital of 17%? (Hint: Note that B is a 6-year project.) Round your answer to two decimal places.
Project A %
Project B %
#8.) What is the crossover rate? Round your answer to two decimal places.
%
#9.) 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.
Nettie 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
-$290
-$400
1
-387
134
2
-193
134
3
-100
134
4
600
134
5
600
134
6
850
134
7
-180
134
Construct NPV profiles for Projects A and B.
# 1.) What is each project's IRR? Round your answers to two decimal places.
Project A %
Project B %
# 2.) Calculate the two projects' NPVs, if you were told that each project's cost of capital was 14%. Round your answers to the nearest cent.
Project A $
Project B $
# 3.) Which project, if either, should be selected?
Project A or Project BItem 6
# 4.) Calculate the two projects' NPVs, if the cost of capital was 17%. Round your answers to the nearest cent.
Project A $
Project B $
# 5.) What would be the proper choice?
Project A or Project B
# 6.) What is each project's MIRR at a cost of capital of 14%? (Hint: Note that B is a 6-year project.) Round your answers to two decimal places.
Project A %
Project B %
# 7. ) What is each project's MIRR at a cost of capital of 17%? (Hint: Note that B is a 6-year project.) Round your answer to two decimal places.
Project A %
Project B %
#8.) What is the crossover rate? Round your answer to two decimal places.
%
#9.) 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.
Explanation / Answer
1.
2.
3. Project B should be used as the NPV is more than Project A
4.
5. Project B should be the proper choice as the NPV is more than Project A
6.
7.
8. Crossover rate is the cost of capital at which the net present values of two projects are equal.
9. If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection.
Year Project A Project B 0 ($290) ($400) 1 -387 134 2 -193 134 3 -100 134 4 600 134 5 600 134 6 850 134 7 -180 134 IRR 18.47% 27.32%Related Questions
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