The new product under consideration may be manufactured either with a Chinese Machine or with a Korean Machine. The Initial Outflow and future flows are given below:

Year	CF (Chinese)	CF (Korean)
0	(4,20,000)	(3,20,000)
1	50,000	80,000
2	75,000	90,000
3	95,000	1,00,000
4	1,50,000	1,10,000
5	1,80,000	1,20,000
6	2,50,000	1,30,000
7	2,50,000	1,40,000

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a) Determine the IRR of the two projects.

b) Determine the Cross-over Rate.

c) Compute the NPVs of the two options using discount rate starting with 10% going up to 28% using only even rates (that is, 10%, 12%, 14%….)

d) Draw the NPV profile of the two projects on the same graph showing the IRR and Cross-over rates.

e) If the cost of capital is 12 percent, which machine should be selected? Fully explain. Assume equal risk.

f) Discuss all the reasons why we prefer NPV to IRR.

Answer rating: 100% (QA)

a IRR of the two projects Chinese Machine IRR 1974 Korean Machine IRR 2098 b Crossover Rate Crossove... View the full answer