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Assume you are presented with the following mutually exclusive investments
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FIN 534 – Homework Set #4

Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell.

Use the following information for Questions 1 through 3:

Assume you are presented with the following 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

1.) (a) What is each project’s IRR?

(b) 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?

2.) (a) What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B’s life.)

3.) What is the crossover rate, and what is its significance?

Net After-Tax Cash Flows

Year P = 0.2 P = 0.6 P = 0.2

0 -\$100,000 -\$100,000 −\$100,000

1 20,000 30,000 40,000

2 20,000 30,000 40,000

3 20,000 30,000 40,000

4 20,000 30,000 40,000

5 20,000 30,000 40,000

5* 0 20,000 30,000

4. Assume that the project has average risk. Find the project’s expected NPV.

(Hint: Use expected values for the net cash flow in each year.)

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