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13. NPV and IRR Analysis Cummings Products Company is considering two mutually exclusive investments whose expected...

13. NPV and IRR Analysis

Cummings Products Company 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
  1. Select the correct graph for NPV profiles for Projects A and B.

   

The correct graph is (select one) graph __?

What is each project's IRR? Do not round intermediate calculations. Round your answers to two decimal places.

Project A:  __%

Project B:  __%

  1. Calculate the two projects' NPVs, if each project's cost of capital was 10%. Do not round intermediate calculations. Round your answers to the nearest cent.

Project A: $__  

Project B: $__  

Which project, if either, should be selected?

Project A or Project B     should be selected.

Calculate the two projects' NPVs, if each project's cost of capital was 17%. Do not round intermediate calculations. Round your answers to the nearest cent.

Project A: $__  

Project B: $__  

What would be the proper choice?

Project A or Project B   is the proper choice.

  1. What is each project's MIRR at a cost of capital of 10%? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. 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: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answers to two decimal places.

Project A:  __%

Project B:  __%

  1. What is the crossover rate? Do not round intermediate calculations. Round your answer to two decimal places.

__ %

What is its significance? (select one)

I. If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections.
II. The crossover rate has no significance in capital budgeting analysis.
III. If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection.

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