Cash Flow (A) Cash Flow (B) -578.500 43.000 29,000 23.000 21,000 -578.500 21.000

Question

Cash Flow (A) Cash Flow (B) -578.500 43.000 29,000 23.000 21,000 -578.500 21.000 28,000 34.000 41,000 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).) Project A Project B Internal rate of return 20.70 % 18.72 % (b) If you apply the IRR decision rule, which project should the company accept? Project A 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 14,426 54 15,012.82 (b)Which project will you choose if you apply the NPV decision rule? 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).) Project A Above (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 Below (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

We will find cross over rate to range above and below of a rate.

We will subtract cash flows of B from A

CF0 = 0

CF1 = 43,000 - 21,000 = 22,000

CF2 = 29,000 - 28,000 = 1,000

CF3 = 23,000 - 34,000 = -11,000

CF4 = 21,000 - 41,000 = -20,000

IRR will be:

0 = 22,000/ (1 + r)1 + 1,000/ (1 + r)2 - 11,000/ (1 + r)3 - 20,000/ (1 + r)4  

r = 12.21%

At above 12.21%, we will choose Project A

and below 12.21% we will choose Project B

At 12.21% we will be indifference among Project A and Project B

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