FIN 534 Week 8 Homework Set 4

FIN 534 Week 8 Homework Set 4
Use the following information for Questions 1 through 5:
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. Construct NPV profiles for Projects A and B.
2. What is each project’s IRR?
3. 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?
4. 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.)
5. What is the crossover rate, and what is its significance?

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