2. In the following table we have cash flows for two mutually exclusive projects under consideration...
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2. In the following table we have cash flows for two mutually exclusive projects under consideration by your firm. You are asked to evaluate the two projects using both the NPV and IRR rules (applied to mutually exclusive projects). Which project do you propose that your firm should proceed with? Project 1 Cash Flows Project 2 Cash Flows Yr 0 -500 -900 Yr 1 Yr 2 300 200 200 300 Yr 3 100 600 a. Plot the NPV profile for each project on the same set of axis. Label both axis appropriately in terms of symbols. b. Now label the numerical values of the Y axis intercepts for each profile. You must show with an equation how you came to these two values. c. Label the numerical values of the X axis intercepts for each profile. You must explain why the number is what it is? Why did you use a particular function on either your calculator or EXCEL to find these. d. When you superimpose both NPV profiles on one graph the graph will easily allow you to determine which project is superior depending on whether you are using the NPV rule or the IRR rule. Obtain the numerical value for the crossover rate in the graph. You must use either excel or your financial calculator to find this rate. What is true about the relative attractiveness of the two projects (according to NPV) at the crossover rate? e. Now, looking at the graph, Which project is preferred according to the NPV rule for mutually exclusive projects if the cost of capital is 5%? Explain in one sentence. You need not do calculations here if you have drawn (and labeled) your graph correctly. f. At the same discount rate as in part e, which project would you choose according to the IRR rule for mutually exclusive projects? Explain why, including a statement of the rule in order to support your conclusion. g. What has this exercise shown you about using NPV vs IRR in the case of mutually exclusive projects with differences in scale. 2. In the following table we have cash flows for two mutually exclusive projects under consideration by your firm. You are asked to evaluate the two projects using both the NPV and IRR rules (applied to mutually exclusive projects). Which project do you propose that your firm should proceed with? Project 1 Cash Flows Project 2 Cash Flows Yr 0 -500 -900 Yr 1 Yr 2 300 200 200 300 Yr 3 100 600 a. Plot the NPV profile for each project on the same set of axis. Label both axis appropriately in terms of symbols. b. Now label the numerical values of the Y axis intercepts for each profile. You must show with an equation how you came to these two values. c. Label the numerical values of the X axis intercepts for each profile. You must explain why the number is what it is? Why did you use a particular function on either your calculator or EXCEL to find these. d. When you superimpose both NPV profiles on one graph the graph will easily allow you to determine which project is superior depending on whether you are using the NPV rule or the IRR rule. Obtain the numerical value for the crossover rate in the graph. You must use either excel or your financial calculator to find this rate. What is true about the relative attractiveness of the two projects (according to NPV) at the crossover rate? e. Now, looking at the graph, Which project is preferred according to the NPV rule for mutually exclusive projects if the cost of capital is 5%? Explain in one sentence. You need not do calculations here if you have drawn (and labeled) your graph correctly. f. At the same discount rate as in part e, which project would you choose according to the IRR rule for mutually exclusive projects? Explain why, including a statement of the rule in order to support your conclusion. g. What has this exercise shown you about using NPV vs IRR in the case of mutually exclusive projects with differences in scale.
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Related Book For
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston
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