Romboski, LLC, has identified the following two mutually exclusive projects: Wha
ID: 2632565 • Letter: R
Question
Romboski, LLC, has identified the following two mutually exclusive projects:
What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Assume the required return is 11 percent. What is the NPV for each of these projects? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Over what range of discount rates would you choose Project A? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Over what range of discount rates would you choose Project B? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g.,32.16).)
At what discount rate would you be indifferent between these two projects? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Year Cash Flow (A) Cash Flow (B) 0 ?$ 65,000 ?$ 65,000 1 34,000 19,000 2 27,000 25,000 3 21,000 29,000 4 17,000 34,000Explanation / Answer
Requirement 1
Let IRR for Project A = IRRA
For IRR, NPV =0
-65000 + 34000/(1+IRRA) + 27000/(1+IRRA)^2 + 21000/(1+IRRA)^3 + +17000/(1+IRRA)^4=0
IRRA = 22.23%
For Project B
-65000 + 19000/(1+IRRB) + 25000/(1+IRRB)^2 + 29000/(1+IRRB)^3 + +34000/(1+IRRB)^4=0
IRRB = 21.01%
Internal rate of return
Project A
22.23%
Project B
21.01%
b) Project A
Requirement 2
NPV of B = -65000 + 19000/(1+11%) + 25000/(1+11%)^2 + 29000/(1+11%)^3 + +34000/(1+11%)^4= 16,009.08
Net present value
Project A
$14097.88
Project B
$ 16009.08
b)
Project B
Requirement
Interest rate
A
B
Better Project
0%
34,000.00
42,000.00
B
10%
15,611.98
17,944.47
B
16.31%
6,831.95
6,831.95
A or B
20%
2,434.41
1,373.46
A
30%
(7,359.16)
(10,487.55)
A
40%
(14,860.47)
(19,254.48)
A
50%
(20,753.09)
(25,913.58)
A
60%
(25,482.18)
(31,091.31)
A
70%
(29,347.65)
(35,199.47)
A
80%
(32,557.54)
(38,516.99)
A
90%
(35,259.90)
(41,237.83)
A
100%
(37,562.50)
(43,500.00)
A
a)Below 16.31%
b)Above 16.31%
c)Discount rate = 16.31%
Internal rate of return
Project A
22.23%
Project B
21.01%
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