Consider the following two mutually exclusive projects: a. Calculate the NPV of each project for discount rates

Question:

Consider the following two mutually exclusive projects:

a. Calculate the NPV of each project for discount rates of 0, 10, and 20 percent. Plot these on a graph with NPV on the vertical axis and discount rate on the horizontal axis.

b. What is the approximate IRR for each project?

c. In what circumstances should the company accept project A?

d. Calculate the NPV of the incremental investment (B ??? A) for discount rates of 0, 10, and 20 percent. Plot these on your graph. Show that the circumstances in which you would accept A are also those in which the IRR on the incremental investment is less than the opportunity cost ofcapital.

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...