Question

Answer the following questions.

A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below:

	Year 0	Year 1	Year 2	Year 3	Year 4
Cashflow for S	-200	150	100	10	10
Cashflow for L	-200	10	10	100	250

Assume the company can get an unlimited amount of capital at that cost.

WACC	NPV (S)	NPV (L)
5%
10%
15%
20%
25%

  

What is the internal rate of return (IRR) for Project S? Project L? If the company’s cost of capital is 5% which project will you choose based on IRR?

Select one:

a. 22.07%, 18.91%, S

b. 19.93%, 15.67%, L

c. 10.00%, 22.55%, L

d. 20.12%, 18.91%, S

e. 22.07%, 17.54%, L

Continued from previous question.  If the company’s cost of capital is 10%, what is the net present value of each Project? What’s the profit foregone if IRR method is used?

Select one:

a. NPVS = $33.35, NPVL = $63.24, $29.89

b. NPVS = $100.81, NPVL = $112.45, $11.25

c. NPVS = $78.81, NPVL = $60.24, $35.51

d. NPVS = $63.24, NPVL = $33.35, $-29.89

e. NPVS = $82.26, NPVL = $75.63, $3.97

Continued from previous question. Which of the following statements is correct?

Select one:

a. The crossover rate should be between 15 and 20%.

b. If the WACC is smaller than the crossover rate, you will choose project S using the NPV method.

c. If the WACC is larger than the crossover rate, a conflict arises between the NPV and the IRR methods.

d. The crossover rate should be between 20% and 25%.

e. The crossover rate should be smaller than 10%.

Answer 1