Question 3: Mutually Exclusive Projects

1) Consider the following cash flows for one-year Project A and B, with required rates of return of 10%. You have limited capital and can invest in one but one project. Which one? (As NPV = 72.73, Bs NPV=227.27, so choose B)

Initial Outlay: A = -$200; B = -$1,500

Inflow: A = $300; B = $1,900

2) Example: Consider two projects, A and B, with initial outlay of $1,000, cost of capital of 10%, and following cash flows in years 1, 2, and 3:

A: $100 $200 $2,000

B: $650 $650 $650

Which project should you choose if they are mutually exclusive? Independent? Crossover rate?

(mutually exclusive: As NPV=758.83 > Bs NPV = 616.45, so choose A; Independent, choose all positive NPV, so choose both;

Crossover rate = 21.01%. The calculator does not work. Use IRR in Excel)

PLEASE SHOW IN A EXCEL FORMAT.