A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below: Years 0 1 2 3 4 S -1,100 900 350 50 10 L -1,100 0 300 500 850 The company's cost of capital is 10 percent, and it can get an unlimited amount of capital at that cost.
a. Calculate each project’s NPV and IRR. Which project would you choose based on each method?
b. Show the NPV profile of the two projects and calculate the crossover rate. Which method gives you the correct answer, NPV or IRR or both? Explain.
c. Calculate each project’s MIRR.
Which project would you choose? Explain why MIRR is better than IRR.
d. Use a data table to do a sensitivity analysis to see how cost of capital affects the IRR and MIRR of the two projects. Explain the intuition.