Specialized Consulting Service Company%u2019s after-tax net cash flows associate

Question

Specialized Consulting Service Company%u2019s after-tax net cash flows associated with two mutually exclusive projects, Alpha and Beta, are as follows:

Cash flow, EOY

Project 0 1 2
Alpha -100 125 0

Beta -100 50 84

a. Calculate the net present value for each project using discount rates of 0, 0.04, 0.08, 0.12, 0.15, 0.20, and 0.25.
b. Prepare a graph as follows. Label the vertical axis %u2018%u2018Net Present Value in Dollars%u2019%u2019 and the horizontal axis %u2018%u2018Discount Rate in Percent per Year.%u2019%u2019 Plot the net present value amounts calculated in part a. for project Alpha and project Beta.
c. State the decision rule for choosing between projects Alpha and Beta as a function of the firm%u2019s cost of capital.
d. What generalizations can you draw from thisexercise?

Explanation / Answer

Year Alpha Beta 4% Alpha Beta Y0 0 84               1.00           -        84.00 Y1 -100 -100               0.96     (96.15)     (96.15) Y2 125 50               0.92     115.57      46.23 NPV      19.42      34.07

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