Comparison of NPV and IRR: The Case of Mutually Exclusive Projects Estimated cashflow data for each of two projects, A and B, and the discount rate, r, to be used for the analysis ofcapital investment projects are given below:[LO 12-9][LO 12-9]Year Project A Project B0 ($10,000) ($10,000)1 $7,000 $2,000 2 $3,000 $3,000 3 $2,000 $4,000 4 $2,000 $6,000 Discount rate, r = 10.0%.Required 1. In a capital budgeting context, explain the difference between independent and mutually exclusiveinvestments. Give an example of each type of investment project. What is the primary implication ofthis distinction for the analysis of capital investment projects?2. Use the built-in functions in Excel to calculate the IRR and the NPV for each investment project. Whichof these projects—if either—should be accepted if they are considered independent projects? RoundIRRs to 2 decimal places and NPVs to the nearest whole dollar. 3. An NPV profile for a project is a plot of the project’s NPV as a function of the discount rate, r, usedto determine NPV. Use Excel to prepare a single chart (graph) containing the NPV profile for the twoprojects, A and B. To generate the plot, use the following values for r: 0%, 4%, 8%, 12%, 16%, and 20%.Interpret each of the following points on your chart: the Y-intercepts; the point at which the two NPVprofiles cross each other (defined as the “crossover rate”); and the X-intercepts
Comparison of
capital investment projects are given below:
[LO 12-9]
[LO 12-9]
Year Project A Project B
0 ($10,000) ($10,000)
1 $7,000 $2,000
2 $3,000 $3,000
3 $2,000 $4,000
4 $2,000 $6,000
Discount rate, r = 10.0%.
Required
1. In a capital budgeting context, explain the difference between independent and mutually exclusive
investments. Give an example of each type of investment project. What is the primary implication of
this distinction for the analysis of capital investment projects?
2. Use the built-in functions in Excel to calculate the IRR and the NPV for each investment project. Which
of these projects—if either—should be accepted if they are considered independent projects? Round
IRRs to 2 decimal places and NPVs to the nearest whole dollar.
3. An NPV profile for a project is a plot of the project’s NPV as a function of the discount rate, r, used
to determine NPV. Use Excel to prepare a single chart (graph) containing the NPV profile for the two
projects, A and B. To generate the plot, use the following values for r: 0%, 4%, 8%, 12%, 16%, and 20%.
Interpret each of the following points on your chart: the Y-intercepts; the point at which the two NPV
profiles cross each other (defined as the “crossover rate”); and the X-intercepts
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