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Problem 10-13 NPV and IRR Analysis

Cummings Products Company is considering two mutually exclusive investments whose expected net cash flows are as follows:

	EXPECTED NET CASH FLOWS
Year	Project A	Project B
0	-$300	-$405
1	-387	134
2	-193	134
3	-100	134
4	600	134
5	600	134
6	850	134
7	-180	134

Construct NPV profiles for Projects A and B.

Select the correct graph.

The correct graph is? A,B,C,D?

b. What is each project's IRR? Do not round intermediate calculations. Round your answers to two decimal places. Project A ?____ % Project B?____ %

c. Calculate the two projects' NPVs, if you were told that each project's cost of capital was 10%. Do not round intermediate calculations. Round your answers to the nearest cent. Project A? $____ Project B? $____ Which project, if either, should be selected? Project A or Project B Calculate the two projects' NPVs, if the cost of capital was 17%. Do not round intermediate calculations. Round your answers to the nearest cent. Project A? $___ Project B? $___ What would be the proper choice? Project A or Project B

d. What is each project's MIRR at a cost of capital of 10%? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answers to two decimal places. Project A? %___ Project B? %___ What is each project's MIRR at a cost of capital of 17%? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answer to two decimal places. Project A? %___ Project B? %___

e. What is the crossover rate? Do not round intermediate calculations. Round your answer to two decimal places. ___%

What is its significance? I. The crossover rate has no significance in capital budgeting analysis. II. If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection. III. If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections.

Correct answer is? ___