Cummings Products Company is considering two mutually exclusive investments whos
ID: 2725573 • Letter: C
Question
Cummings Products Company is considering two mutually exclusive investments whose expected net cash flows are as follows: EXPECTED NET CASH FLOWS
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 14%. Round your answers to the nearest cent.
Project A $
Project B $
Which project, if either, should be selected?
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?
What is each project's MIRR at a cost of capital of 14%? (Hint: Note that B is a 7-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 7-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.
%
What is its significance?
I.The crossover rate has no significance in capital budgeting analysis.
II.If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection.
III.If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections.
Explanation / Answer
Year Project A present value @14% present value of cash flow year Project B present value @14% present value of cash flow 0 ($290) 0 ($400) 1 -387 0.877193 -339.474 1 134 0.877193 117.5439 2 -193 0.7694675 -148.507 2 134 0.769468 103.1086 3 -100 0.6749715 -67.4972 3 134 0.674972 90.44618 4 600 0.5920803 355.2482 4 134 0.59208 79.33876 5 600 0.5193687 311.6212 5 134 0.519369 69.5954 6 850 0.4555865 387.2486 6 134 0.455587 61.0486 7 -180 0.3996373 -71.9347 7 134 0.399637 53.5514 sum of present value of cash flow 426.7051 sum of present value of cash flow 574.6328 cash out flow ($290) cash out flow ($400) NPV $137 NPV $175 IRR 18.47% IRR 27.32% MIRR 16.28% MIRR 20.06% project B would be selected Year Project A present value @17% present value of cash flow year Project B present value @17% present value of cash flow 0 ($290) 0 ($400) 1 -387 0.8547009 -330.769 1 134 0.854701 114.5299 2 -193 0.7305136 -140.989 2 134 0.730514 97.88882 3 -100 0.6243706 -62.4371 3 134 0.624371 83.66565 4 600 0.53365 320.19 4 134 0.53365 71.50911 5 600 0.4561112 273.6667 5 134 0.456111 61.11889 6 850 0.3898386 331.3628 6 134 0.389839 52.23837 7 -180 0.3331954 -59.9752 7 134 0.333195 44.64818 sum of present value of cash flow 331.049 sum of present value of cash flow 525.5989 cash out flow ($290) cash out flow ($400) NPV $41 NPV $126 IRR 18.47% IRR 27.32% project B would be selected Crossover rate is the cost of capital at which the net present values of two projects are equal. It is the point at which the net present value profile of one project crosses over (intersects) the net present value profile of the other project. Crossover rate is useful in capital budgeting analysis because it informs the investing company about a scenario when a currently-feasible project will no longer be feasible. project A cash flow Project B cash flow difference ($290) ($400) ($110) -387 134 $521 -193 134 $327 -100 134 $234 600 134 ($466) 600 134 ($466) 850 134 ($716) -180 134 $314 cross over rate 11.94% If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections.
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