Keller Construction is considering two new investments. Project E calls for the purchase of earth-moving equipment. Project H represents the
a. Determine the NPV of the projects based on a zero discount rate.
b. Determine the NPV of the projects based on a 9 percent discount rate.
c. The IRR on Project E is 13.23 percent, and the IRR on Project H is 16.29 percent. Graph a NPV profile for the two investments, similar to Figure 12-3. (Use a scale up to $8,000 on the vertical axis, with $2,000 increments. Use a scale up to 20 percent on the horizontal axis, with 5 percent increments.)
In figure 12-3
d. If the two projects are not mutually exclusive, what would your acceptance or rejection decision be if the cost of capital (discount rate) is 10 percent? (Use the NPV profile for your decision; no actual numbers are necessary.)
e. If the two projects are mutually exclusive (the selection of one precludes the selection of the other), what would be your decision if the cost of capital is
(1) 6 percent,
(2) 13 percent,
(3) 18 percent?
Use the NPV profile for your answer.Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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