Cummings Products is considering two mutually exclusive investments whose expect

Question

Cummings Products is considering two mutually exclusive   investments whose expected net cash flows are as follows: Expected Net Cash Flows Year Project A Project B 0 -400 -650 1 -528 210 2 -219 210 3 -150 210 4 1,100 210 5 820 210 6 990 210 7 -325 210 a. Construct   NPV profiles for Projects A and B b. What is   each project's IRR? c. If each   project's cost of capital were 10%, which project, if either, should be   selected? If the cost of capital were 17%, what would be the proper choice? d. What is   each project's MIRR at the cost of capital of 10%? At 17%? (consider period 7   as the end of Project B's life) e. What is   the corssover rate, and what is its significance? Cummings Products is considering two mutually exclusive   investments whose expected net cash flows are as follows: Expected Net Cash Flows Year Project A Project B 0 -400 -650 1 -528 210 2 -219 210 3 -150 210 4 1,100 210 5 820 210 6 990 210 7 -325 210 a. Construct   NPV profiles for Projects A and B b. What is   each project's IRR? c. If each   project's cost of capital were 10%, which project, if either, should be   selected? If the cost of capital were 17%, what would be the proper choice? d. What is   each project's MIRR at the cost of capital of 10%? At 17%? (consider period 7   as the end of Project B's life) e. What is   the corssover rate, and what is its significance?

Explanation / Answer

a. If COC is 10%

Project A= -400-528/(1.1)-219/(1.1)^2.....-325/(1.1)^7

=478.8341

Project B=-650+210/(1.1)+210/(1.1)^2.....+210/(1.1)^7

=372.3680

If coc is 17%

Project A=133.7578

Project B =173.6998

b. IRR of a

0=-400-528/(1+IRR)-219/(1+IRR)^2.....-325/(1+IRR)^7

IRR= 20.65%

project b

0=-650+210/(1+IRR)+210/(1+IRR)^2.....+210/(1+IRR)^7

IRR=25.84%

c. If cost os capital is 10% then project a should be selected as it has higher NPV.

If cst of capita is 17%, then project B should be selected.

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