Cummings Products Company is considering two mutually exclusive investments whos
ID: 2640252 • Letter: C
Question
Cummings Products Company is considering two mutually exclusive investments whose expected net cash flows are as follows:
Construct NPV profiles for Projects A and B.
Select the correct graph.
The correct graph is -Select-ABCDItem 1 .
What is each project's IRR? Round your answers to two decimal places.
Project A %
Project B %
Calculate the two projects' NPVs, if you were told that each project's cost of capital was 10%. Round your answers to the nearest cent.
Project A $
Project B $
Which project, if either, should be selected?
-Select-Project AProject BItem 6
Calculate the two projects' NPVs, if the cost of capital was 17%. Round your answers to the nearest cent.
Project A $
Project B $
What would be the proper choice?
-Select-Project AProject BItem 9
What is each project's MIRR at a cost of capital of 10%? (Hint: Note that B is a 6-year project.) Round your answers to two decimal places.
Project A %
Project B %
What is each project's MIRR at a cost of capital of 17%? (Hint: Note that B is a 6-year project.) Round your answer to two decimal places.
Project A %
Project B %
What is the crossover rate? Round your answer to two decimal places.
%
Explanation / Answer
Part (a) - Which graph is correct
NPV is acronym for Net Present Value, which means the difference in present values of the outflow and present values of the inflow in a project or decision making involving flow and receipt of funds.
In the given scenario NPV of both the project at cost of capital at 0% are:
Table showing net cash flows of both the projects at Cost of Capital at 0%
Year
Project A
Project B
0
$ (300)
$ (405)
1
$ (387)
$ 134
2
$ (193)
$ 134
3
$ (100)
$ 134
4
$ 600
$ 134
5
$ 600
$ 134
6
$ 850
$ 134
7
$ (180)
$ 134
NPV
$ 890
$ 533
Solution : Taking above table as the basis graph D is right
Part (b)
IRR is acronym for Internal Rate of Return, which means that at what discount rate NPV of a project or decision making involving flow and receipt of funds will be zero.
In the given scenario NPV as zero of both the projects lies between 15% - 20% for Project A and 25% - 30% for project B as shown in the table:
Table showing net cash flows of both the projects at various discount rates
For Project A
Year
PV at 0% (in $)
PV at 15% ($)
PV at 20% ($)
0
-300
-300
-300
1
-387
-336.52
-322.50
2
-193
-145.94
-134.03
3
-100
-65.75
-57.87
4
600
343.05
289.35
5
600
298.31
241.13
6
850
367.48
284.66
7
-180
-67.67
-50.23
NPV
890
92.96
-49.49
For Project B
Year
PV at 0% ($)
PV at 25% ($)
PV at 30% ($)
0
-405
-405
-405
1
134
107.20
103.08
2
134
85.76
79.29
3
134
68.61
60.99
4
134
54.89
46.92
5
134
43.91
36.09
6
134
35.13
27.76
7
134
28.10
21.36
NPV
533
18.59
-29.52
Using this formula we drive the IRR of the Projects = Lowest discount rate from the table for each project + (Difference in the discount rates
Year
Project A
Project B
0
$ (300)
$ (405)
1
$ (387)
$ 134
2
$ (193)
$ 134
3
$ (100)
$ 134
4
$ 600
$ 134
5
$ 600
$ 134
6
$ 850
$ 134
7
$ (180)
$ 134
NPV
$ 890
$ 533
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