You are considering an investment in one of three projects, A, B, or C (mutually

Question

You are considering an investment in one of three projects, A, B, or C (mutually exclusive) with the following projected cash flows:

cost of capital = 11%

1) Calculate NPV for each project.

2) Calculate IRR for each project.

3) Calculate PI for each project.

4) Using cost of capital, calculate MIRR for each project.

5) Calculate the exact crossover rate between project A & B.

6) Calculate NPV at the crossover rate between A & B.

7) Which project should be accepted and why?

Year Project A Project B Project C Diff. (A-B) 0 -50,000 -50,000 -20,000 0 1 20,000 35,000 30,000 -15,000 2 25,000 30,000 30,000 -5,000 3 30,000 25,000 -40,000 5,000 4 35,000 20,000 0 15,000 5 40,000 15,000 0 25,000

Explanation / Answer

Year Project A Project B Project C Diff. (A-B) 0 -50,000 -50,000 -20,000 0 1 20,000 35,000 30,000 -15,000 2 25,000 30,000 30,000 -5,000 3 30,000 25,000 -40,000 5,000 4 35,000 20,000 0 15,000 5 40,000 15,000 0 25,000 1) NPV                    57,037.96                    46,236.38    2,128.04 2) IRR 44.65% 50.00% 0.00% 3) PI                               2.14                              1.92 4) MIRR 29.73% 26.74% 33.67% 29.71% 5) Cross over rate 29.32% 6) NPV at crossover rate                    17,866.40                    17,866.40 7) Project A should be accepted because of higher NPV and crossover rate is above MIRR

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