FIN 534 – Homework Set #4
Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell.
Use the following information for Questions 1 through 3:
Assume you are presented with the following mutually exclusive investments whose expected net cash flows are as follows:
EXPECTED NET CASH FLOWS:
Year Project A Project B
0 -$400 -$650
1 -528 210
2 -219 210
3 – 150 210
4 1,100 210
5 820 210
6 990 210
7 -325 210
1.) (a) What is each project’s IRR?
(b) If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice?
2.) (a) What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B’s life.)
3.) What is the crossover rate, and what is its significance?
Net After-Tax Cash Flows
Year P = 0.2 P = 0.6 P = 0.2
0 -$100,000 -$100,000 −$100,000
1 20,000 30,000 40,000
2 20,000 30,000 40,000
3 20,000 30,000 40,000
4 20,000 30,000 40,000
5 20,000 30,000 40,000
5* 0 20,000 30,000
4. Assume that the project has average risk. Find the project’s expected NPV.
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