Question: Consider the following two projects. 0 1 2 3 |---------------------|-----------------------|----------------------| Project A: -1,000 500 500 280 Project B: -1,000 430 430 430 NPV Profile NPV

Consider the following two projects.

0 1 2 3

|---------------------|-----------------------|----------------------|

Project A: -1,000 500 500 280

Project B: -1,000 430 430 430

NPV Profile

Consider the following two projects. 0 1 2 3 |---------------------|-----------------------|----------------------| Project A: NPV

-1,000 500 500 280 Project B: -1,000 430 430 430 NPV Profile NPV NPV1 Project B Project A NPV2 NPV3 r1 r2 r3 Projects NPV1 Project B

cost of capital (= r) Find r1(crossover rate), r2, and r3. If Project A

the projects cost of capital is 10% and the projects are mutually exclusive (only highest NPV project should be chosen), what project do you have to choose? What if the projects cost of capital is 3%? NPV2

NPV3

image text in transcribed

r1 r2 r3 Projects cost of capital (= r)

Find r1(crossover rate), r2, and r3.

If the projects cost of capital is 10% and the projects are mutually exclusive (only highest NPV project should be chosen), what project do you have to choose? What if the projects cost of capital is 3%?

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