NPV and IRR AnalysisCummings Products is considering two mutually .pdf
Problem 12-13 NPV and IRR AnalysisCummings Products is consideri.pdf
0 likes
views
Problem 12-13 NPV and IRR Analysis Cummings Products is considering two mutually exclusive investments whose expected net cash flows are as follows: Construct NPV profiles for Projects A and B. Select the correct graph. The correct graph is -Select-ABCDItem 1 . What is each project\'s IRR? Round your answers to two decimal places. Project A % Project B % Calculate the two projects\' NPVs, if you were told that each project\'s cost of capital was 11%. Round your answers to the nearest cent. Project A $ Project B $ Which project, if either, should be selected? -Select-Project AProject BItem 6 Calculate the two projects\' NPVs, if the cost of capital was 16%. Round your answers to the nearest cent. Project A $ Project B $ What would be the proper choice? -Select-Project AProject BItem 9 What is each project\'s MIRR at a cost of capital of 11%? (Hint: Note that B is a 7-year project.) Round your answers to two decimal places. Project A % Project B % What is each project\'s MIRR at a cost of capital of 16%? (Hint: Note that B is a 7-year project.) Round your answer to two decimal places. Project A % Project B % What is the crossover rate? Round your answer to two decimal places. % What is its significance? -Select-IIIIIIItem 15 I.If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection. II.If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections. III.The crossover rate has no significance in capital budgeting analysis.EXPECTED NET CASH FLOWSYearProject AProject B0-$320-$3601-3871342-1931343- 1001344600134560013468501347-180134 Solution Since, there are multiple sub-parts, the first five parts have been answered. Part A) NPV Profiles The NPV Profile at different levels of cost of capital has been calculated with the use of following tables: Project A __________ Project B __________ Part B) Selection of Graph The correct graph is C. It is so because, the NPV at 20% and 25% for Project A is negative and the same is demonstrated in Graph C. The NPV for Project B is positive at all the levels and declining which again is evident from the slope for Project B shown in graph C. __________ Part C) The IRR can be calculated with the use of IRR function/formula of EXCEL/Financial Calculator. The basic formula for IRR is given below: NPV = 0 = -Cash Flow Year 0 + Cash Flow Year 1/(1+IRR)^1 + Cash Flow Year 2/(1+IRR)^2 + Cash Flow Year 3/(1+IRR)^3 + Cash Flow Year 4/(1+IRR)^4 + Cash Flow Year 5/(1+IRR)^5 + Cash Flow Year 6/(1+IRR)^6 + Cash Flow Year 7/(1+IRR)^7 __________ The IRR has been calculated with the use of EXCEL in the following tables: IRR Project A = 17.38% IRR Project B = 31.85% __________ Part D) NPV at 11% has been calculated with the use of following tables: Based on the above calculations, Project B should be selected as it results in higher NPV of $271.43. __________ Part D) NPV at 16% has been calculated with .
Recommended
Problem 12-13 NPV and IRR AnalysisCummings Products is consideri.pdf
- Problem 12-13 NPV and IRR Analysis Cummings Products is considering two mutually exclusive investments whose expected net cash flows are as follows: Construct NPV profiles for Projects A and B. Select the correct graph. The correct graph is -Select-ABCDItem 1 . What is each project's IRR? Round your answers to two decimal places. Project A % Project B % Calculate the two projects' NPVs, if you were told that each project's cost of capital was 11%. Round your answers to the nearest cent. Project A $ Project B $ Which project, if either, should be selected? -Select-Project AProject BItem 6 Calculate the two projects' NPVs, if the cost of capital was 16%. Round your answers to the nearest cent. Project A $ Project B $ What would be the proper choice? -Select-Project AProject BItem 9 What is each project's MIRR at a cost of capital of 11%? (Hint: Note that B is a 7-year project.) Round your answers to two decimal places.
- Project A % Project B % What is each project's MIRR at a cost of capital of 16%? (Hint: Note that B is a 7-year project.) Round your answer to two decimal places. Project A % Project B % What is the crossover rate? Round your answer to two decimal places. % What is its significance? -Select-IIIIIIItem 15 I.If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection. II.If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections. III.The crossover rate has no significance in capital budgeting analysis.EXPECTED NET CASH FLOWSYearProject AProject B0-$320-$3601-3871342-1931343- 1001344600134560013468501347-180134 Solution Since, there are multiple sub-parts, the first five parts have been answered. Part A) NPV Profiles The NPV Profile at different levels of cost of capital has been calculated with the use of following tables: Project A __________ Project B __________
- Part B) Selection of Graph The correct graph is C. It is so because, the NPV at 20% and 25% for Project A is negative and the same is demonstrated in Graph C. The NPV for Project B is positive at all the levels and declining which again is evident from the slope for Project B shown in graph C. __________ Part C) The IRR can be calculated with the use of IRR function/formula of EXCEL/Financial Calculator. The basic formula for IRR is given below: NPV = 0 = -Cash Flow Year 0 + Cash Flow Year 1/(1+IRR)^1 + Cash Flow Year 2/(1+IRR)^2 + Cash Flow Year 3/(1+IRR)^3 + Cash Flow Year 4/(1+IRR)^4 + Cash Flow Year 5/(1+IRR)^5 + Cash Flow Year 6/(1+IRR)^6 + Cash Flow Year 7/(1+IRR)^7 __________ The IRR has been calculated with the use of EXCEL in the following tables: IRR Project A = 17.38% IRR Project B = 31.85% __________ Part D) NPV at 11% has been calculated with the use of following tables: Based on the above calculations, Project B should be selected as it results in higher NPV of $271.43. __________ Part D) NPV at 16% has been calculated with the use of following tables: Based on the above calculations, Project B should be selected as it results in higher NPV of $181.17.Present Value Interest FactorPresent Value of Cash FlowsYearProject A5.00%10.00%15.00%20.00%25.00%5.00%10.00%15.00%20.00%25.00%0-32011111-320- 320-320-320-3201-3870.95240.90910.86960.83330.8000-368.57-351.82-336.52-322.50- 309.602-1930.90700.82640.75610.69440.6400-175.06-159.50-145.94-134.03-123.523- 1000.86380.75130.65750.57870.5120-86.38-75.13-65.75-57.87- 51.2046000.82270.68300.57180.48230.4096493.62409.81343.05289.35245.7656000.78350.620 90.49720.40190.3277470.12372.55298.31241.13196.6168500.74620.56450.43230.33490.26216 34.28479.80367.48284.66222.827-1800.71070.51320.37590.27910.2097-127.92-92.37-67.67- 50.23-37.75NPV$520.09$263.34$72.96-$69.49-$176.88