Use the following information for Questions 1 through 3:
Assume you are presented with the following mutually exclusive investments whose expected net cash flows are as follows:
EXPECTED NET CASH FLOWS:
|
Year
|
Project A
|
Project B
|
|
0
|
-$400
|
-$650
|
|
1
|
-528
|
210
|
|
2
|
-219
|
210
|
|
3
|
-150
|
210
|
|
4
|
1,100
|
210
|
|
5
|
820
|
210
|
|
6
|
990
|
210
|
|
7
|
-325
|
210
|
1. (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?
2. (a) 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.)
3. What is the crossover rate, and what is its significance?
Use the following information for Question 4:
The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for a new manufacturing process:
Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the estimated salvage values. Porter's cost of capital for an average-risk project is 10%.
|
Year
|
P = 0.2
|
P = 0.6
|
P = 0.2
|
|
0
|
-$100,000
|
-$100,000
|
-$100,000
|
|
1
|
20,000
|
30,000
|
40,000
|
|
2
|
20,000
|
30,000
|
40,000
|
|
3
|
20,000
|
30,000
|
40,000
|
|
4
|
20,000
|
30,000
|
40,000
|
|
5
|
20,000
|
30,000
|
40,000
|
|
5*
|
0
|
20,000
|
30,000
|
4. Assume that the project has average risk. Find the project's expected NPV. (Hint: Use expected values for the net cash flow in each year.)