Question: Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of
Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these.
| Time | Project A Cash Flows | Project B Cash Flows |
| 0 | -$300,000 | -$405,000 |
| 1 | -387,000 | 134,000 |
| 2 | -193,000 | 134,000 |
| 3 | -100,000 | 134,000 |
| 4 | 600,000 | 134,000 |
| 5 | 600,000 | 134,000 |
| 6 | 850,000 | 134,000 |
| 7 | -180,000 | 0 |
- Sketch the NPV profile for projects A & B.
- Determine the crossover point for these projects NPV profiles.
- Assuming a cost of capital of 14%, which of these projects should be accepted?
- Under what conditions on the cost of capital should project B be preferred to project A?
- If Project A and Project B are independent, which project should be undertaken?
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