UF Company is considering Projects S and L$,$ whose cash flows are shown below. These projects are mutually exclusive, equally risky, and are not repeatable. WACC: $7\mathrm{.}75\%$

Year $01234$

CFS $($$$1,050)$ $$700$ $$625$

CFL $($$$1,050)$ $$370$ $$370$ $$360$ $$360$ NPV means Net present value

NPV $=$ present value of cash inflows $-$ initial investment

NPV of Project S :$-$

Present value of cash inflows :$-$

year Cash flows PVF@$7\mathrm{.}75\%$ PV of CF

$17000\mathrm{.}928074649\mathrm{.}6519722$

$26250\mathrm{.}861322538\mathrm{.}3261287$

PV of cash inflows $1187\mathrm{.}978101$

NPV$$of$$project$$S$=$$$1,187\mathrm{.}9781011,050=$$$137\mathrm{.}98$

NPV of project S $=$ $ $137\mathrm{.}978101$

NPV of project L :$-$

Present value of cash inflows :$-$

year Cash flows PVF@$7\mathrm{.}75\%$ PV of CF

$13700\mathrm{.}928074343\mathrm{.}387471$

$23700\mathrm{.}861322318\mathrm{.}6890682$

$33600\mathrm{.}799371287\mathrm{.}7734108$

$43600\mathrm{.}741875267\mathrm{.}0750912$

PV of cash inflows $1216\mathrm{.}925041$

NPV $=$ present value of cash inflows $-$ inital investment

NPV$=$$$1,216\mathrm{.}9250411,050=$$$166\mathrm{.}93$

NPV $=$ $$166\mathrm{.}93$ IRRS IRRL

Years Cash Flows Years Cash Flows

$0-10500-1050$

$17001370$

$26252370$

$3360$

IRR $17\mathrm{.}38\%4360$

IRR $14\mathrm{.}72\%$ Project S has a higher IRR compared to project L$.$ However, Project L has a higher NPV$.$

DECISION AND VALUE FORGONE

Choosen project based on higher IRR: project S

Value forgone by not choosing project L: $$28\mathrm{.}954)$ Find the crossover rate