Problem: Derek’s Donuts is considering two mutually exclusive investments. The projects expected net cash flows are as follows:
| Year |
Project A |
Project B |
| 0 |
($300) |
($405) |
| 1 |
($387) |
$134 |
| 2 |
($193) |
$134 |
| 3 |
($100) |
$134 |
| 4 |
$500 |
$134 |
| 5 |
$500 |
$134 |
| 6 |
$850 |
$134 |
| 7 |
$100 |
$0 |
Q1. Construct NPV profiles for Projects A and B
Q2. What is each projects IRR?
Q3. If you were told that each project's required rate of return was 12percent, which project should be selected? If the required rate of return was 15%, what would be the proper choice?
Q4. Looking at the NPV profiles constructed in part (a), what is the approximate crossover rate, and what is its significance?