USE THE FOLLOWING PROJECT CASH FLOWS FOR QUESTIONS 6-10: Project A Project B Pro
ID: 2624956 • Letter: U
Question
USE THE FOLLOWING PROJECT CASH FLOWS FOR QUESTIONS 6-10:
Project A Project B Project C Project D Project E
Today (20,000) (30,000) (7,500) (4,000) (6,000)
Year 1 10,000 6,000 2,000 2,000 750
Year 2 6,000 8,000 3,000 2,500 1,500
Year 3 4,000 10,000 4,000 3,000 2,250
Year 4 2,000 8,000 2,500 3,000
Year 5 1,000 6,000 2,000 3,750
Year 6 500 4,000 (8,000) 4,000
6. What is the payback period of project E?
7. What is the crossover rate between projects A and B?
8. The IRR of project D is 0%, is it a good project if the cost of capital is 10%?
9. What is the NPV of project C if the cost of capital is 6%
10.If A and C are repeatable, mutually exclusive projects, then which one is better if the WACC is 8%? a) Project A b) Project B
Explanation / Answer
6. Payback period for E = 3+ (6000-750-1500-2250)/3000= 3.50 years
7. let crossover rate = r
NPV is same at crossover rate
-20000 + 10000/(1+r) + 6000/(1+r)^2 + 4000/(1+r)^3 + 2000/(1+r)^4 + 1000/(1+r)^5 + 500/(1+r)^6 = -30000 + 6000/(1+r) + 8000/(1+r)^2 + 10000/(1+r)^3 + 8000/(1+r)^4 + 6000/(1+r)^5 + 4000/(1+r)^6
crossover rate =13.59%
8. No, for a project to be good, cost of capital shoul d be less than IRR
9. NPV of c = -7500+ 2000/1.06 + 3000/1.06^2 + 4000/1.06^3= $415.26
10. NPV of A = -20000 + 10000/(1+8%) + 6000/(1+8%)^2 + 4000/(1+8%)^3 + 2000/(1+8%)^4 + 1000/(1+8%)^5 + 500/(1+8%)^6= $44.35
NPV of B = =-30000 + 6000/(1+8%) + 8000/(1+8%)^2 + 10000/(1+8%)^3 + 8000/(1+8%)^4 + 6000/(1+8%)^5= $316.33
NPV of B is higher, and hence B is better
b) Project B
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