Problem: Cummings Products Company is considering two mutually exclusive investments.
The projects' expected net cash flows are as follows:
Expected Net Cash Flows
Year Project A Project B
0 ($300) ($405)
1 (387) 134
2 (193) 134
3 (100) 134
4 600 134
5 600 134
6 850 134
7 (180) 0
1) Construct NPV profiles for Projects A and B.
2) What is each project's IRR?
3) If you were told that each project's cost of capital was 10%, which project should be selected? If the cost of capital was 17%, what would be the proper choice?
4) What is each project's MIRR at a 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?