Question

# 19. Your division is considering two investment projects, each of which requires an up-front expenditure of...

19. Your division is considering two investment projects, each of which requires an up-front expenditure of \$24 million. You estimate that the cost of capital is 12% and that the investments will produce the following after-tax cash flows (in millions of dollars):

 Year Project A Project B 1 5 20 2 10 10 3 15 8 4 20 6
1. What is the regular payback period for each of the projects? Round your answers to two decimal places.

Project A: _years

Project B: _years

1. What is the discounted payback period for each of the projects? Do not round intermediate calculations. Round your answers to two decimal places.

Project A: _years

Project B: _years

1. If the two projects are independent and the cost of capital is 12%, which project or projects should the firm undertake?

The firm should undertake (select one) Project A or Project B or both projects

1. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake?

The firm should undertake (Select one) Project A or Project B

1. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake?

The firm should undertake (Select one) Project A or Project B

1. What is the crossover rate? Round your answer to two decimal places.

__%

1. If the cost of capital is 12%, what is the modified IRR (MIRR) of each project? Do not round intermediate calculations. Round your answers to two decimal places.

Project A:   __%

Project B:   __%

20. The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost \$22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of \$6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given below. The company's cost of capital is 6 percent.

 Year Annual Operating Cash Flow Salvage Value 0 -\$22,500 \$22,500 1 6,250 17,500 2 6,250 14,000 3 6,250 11,000 4 6,250 5,000 5 6,250 0
1. What is the optimal number of years to operate the truck? Do not round intermediate calculations. Round your answers to the nearest whole number.

__years

1. Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project? (select one)

I. Yes. Salvage possibilities could only lower NPV and IRR.
II. Salvage possibilities would have no effect on NPV and IRR.
III. No. Salvage possibilities could only raise NPV and IRR.

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