Assume you are presented with the following mutually exclusive investments whose expected net cash flows are as follows:
EXPECTED NET CASH FLOWS:
Year Project A Project B
0 -$400 -$650
1 -528 210
2 -219 210
3 -150 210
4 1,100 210
5 820 210
6 990 210
7 -325 210
1. Construct NPV profiles for Projects A and B.
2. What is each project's IRR?
3. If each project's cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice?
4. What is each project's MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B's life.)
5. What is the crossover rate, and what is its significance?