Romboski, LLC, has identified the following two mutually exclusive projects Year

Question

Romboski, LLC, has identified the following two mutually exclusive projects Year Cash Flow (A) Cash Flow (B) -$78,500 43,000 29,000 23,000 21,000 -$78,500 21,000 28,000 34,000 41,000 4 Requirement 1: (a) What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Internal rate of return Project A Project B (b) If you apply the IRR decision rule, which project should the company accept? Click to select) V Requirement 2: (a) Assume the required return is 11 percent. What is the NPV for each of these projects? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Net present value Project A Project B (b)Which project will you choose if you apply the NPV decision rule? Click to select) V Requirement 3: (a) Over what range of discount rates would you choose Project A? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Proiect A (Click to select) v (b) Over what range of discount rates would you choose Project B? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g.,32.16).) Project B (Click to select) (c) At what discount rate would you be indifferent between these two projects? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Discount rate

Explanation / Answer

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

- IRR is the rate at which NPV = 0

Project A:

NPV = -78500 + 43000/(1+IRR)^1 + 29000/(1+IRR)^2 + 23000/(1+IRR)^3 + 21000/(1+IRR)^4 = 0

By trail and error, IRR = 20.70%

Project B:

NPV = -78500 + 21000/(1+IRR)^1 + 28000/(1+IRR)^2 + 34000/(1+IRR)^3 + 41000/(1+IRR)^4 = 0

By trail and error, IRR = 18.73%

b.

From IRR rule, you would choose project A, since the IRR is greater.

2.

Project A:

NPV = -78500 + 43000/(1+0.11)^1 + 29000/(1+0.11)^2 + 23000/(1+0.11)^3 + 21000/(1+0.11)^4  

NPV = 14426.54

Project B:

NPV = -78500 + 21000/(1+0.11)^1 + 28000/(1+0.11)^2 + 34000/(1+0.11)^3 + 41000/(1+0.11)^4 = 0

NPV = 15012.82

b.

Choose project B, since NPV is higher.

3.

At crossover rate, NPVA - NPV B = 0

0 = [-78500 + 43000/(1+r)^1 + 29000/(1+r)^2 + 23000/(1+r)^3 + 21000/(1+r)^4] - [-78500 + 21000/(1+r)^1 + 28000/(1+r)^2 + 34000/(1+r)^3 + 41000/(1+r)^4]

By trail and error, r= 12.21%

For discount rates above 12.21% choose project A.

For discount rates below 12.21% choose project B.

Indifferent between the two projects at 12.21%

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