Your division is considering two investment projects, each of which requires an upfront expenditure of $30 million.
Question:
Your division is considering two investment projects, each of which requires an upfront
expenditure of $30 million. You estimate that the cost of capital is 10% and that the investments
will produce the following after-tax cash flows (in millions of dollars).
Year Project A Project B
1 10 10
2 10 10
3 15 10
4 20 10
a. Calculate the NPV and IRR of two projects. If the two projects are independent and the cost
of capital is 10%, which project or projects should the firm undertake?
b. What is the crossover rate? What does it mean?
c. Calculate the crossover rate and if the two projects are mutually exclusive and the cost of
capital is 5% which project should the firm undertake?
d. If the cost of Capital is 12% what is the MIRR of each project?
Management Now skills for 21st century management
ISBN: 978-0073377292
2nd edition
Authors: Dr. Andrew Ghillyer