Net present value graph and indifference cost of capital. Specialized Consulting Service Company's after-tax net cash flows associated with two mutually exclusive projects, Alpha and Beta, are as follows:
Cash Flow, End of Year
|
Project
|
0
|
1
|
2
|
|
Alpha
|
$(100)
|
$125
|
---
|
|
Beta
|
(100)
|
50
|
$84
|
a. Calculate the net present value for each project using discount rates of 0, 0.04, 0.08, 0.12, 0.15, 0.20, and 0.25.
b. Prepare a graph as follows. Label the vertical axis ''Net Present Value in Dollars'' and the horizontal axis ''Discount Rate in Percent per Year.'' Plot the net present value amounts calculated in part a. for project Alpha and project Beta.
c. State the decision rule for choosing between projects Alpha and Beta as a function of the firm's cost of capital.
d. What generalizations can you draw from this exercise?