We have two mutually exclusive investments with the following cash flows: Year Investment A Investment B 0
Question:
We have two mutually exclusive investments with the following cash flows: Year Investment A Investment B 0 -$100 -$100 1 50 20 2 40 40 3 40 50 4 30 60
a. Using a financial calculator, calculate the IRR for each of the investments.
b. Based on the IRR rule and a required return of 15%, which investment should we choose?
c. Calculate the NPV profile for each investment, using the discount rates of 0%, 5%, 10%, 15%, 20%, and 25%. Perform this task in an Excel spreadsheet. Cautionary note: If you use the =NPV() function in Excel to calculate the NPVs, it will provide incorrect answers. The NPV() function actually calculates the present value of all cash inflows. The NPV should be calculated as =NPV(all cash inflows) – initial cash outflow.
d. Plot the NPV profile for both projects using the X-Y scatter function in Excel.
e. If the required return on this project is 16%, would both NPV and IRR give us the same conclusion? Explain your answer.
f. If the required return on this project is 9%, would both NPV and IRR give us the same conclusion? Explain your answer.
h. Calculate the crossover rate at which we are indifferent between the two investments.
Basic Finance An Introduction to Financial Institutions, Investments and Management
ISBN: 978-1285425795
11th Edition
Authors: Herbert B. Mayo