Question 1.) NPV versus IRR Consider the following two mutually exclusive projects:
Year Cash Flow (X) Cash Flow (Y)
0 -$43,000 -$43,000
1 23,000 7,000
2 17,900 13,800
3 12,400 24,000
4 9,400 26,000
Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects?
Question 2.) The Weiland Computer Corporation is trying to choose between the following two manually exclusive design projects:
Year Cash Flow (I) Cash Flow (II)
0 -$53,000 -$16,000
1 27,000 9,100
2 27,000 9,100
3 27,000 9,100
a. If the required return is 10 percent and the company applies the profitability index decision rule, which project should the firm accept?
b. If the company applies the NPV decision rule, which project should it take?
c. Explain why your answers in (a) and (b) are different.
Question 3.) An investment has an installed cost of $684,680. The cash flows over the four-year life of the investment are projected to be $263,279, $294,060, $227,604 and $174,356. If the discount rate is zero, what is the NPV? If the discount rate is infinite, what is the NPV? At what discount rate is the NPV just equal to zero? Sketch the NPV profile for this investment based on these three points.