Suppose your firm is choosing between two new product lines. One project has an initial investment of
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Question:
- Suppose your firm is choosing between two new product lines. One project has an initial investment of $450 million and offers annual cashflows of $160 million for 5 years. The other has an initial investment of $1,560 million and offers annual cashflows of $475 million for 5 years.
- Using the payback period, which project would you suggest? (2 points)
- If your cost of capital is estimated to be 7%, which project offers the higher NPV? (4 points)
- What is the IRR of each project? If you used the IRR, which project would you select? (4 points)
- What is the cross-over rate for these projects? Which project is preferred below that rate? Which project is preferred above that rate? (10 points)
- Plot the NPV profile for these projects. (Hint: use the NPV at 7%, the crossover rate, and the IRRs) (5 points)
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