Your firm is considering two projects that are mutually exclusive. Each project will require an initial outlay of $200,000. The forecast yearly cash flows are shown below. Time Project A Project B 0 -220,000 -220,000 1 -25,000 120,000 2 80,000 80,000 3 100,000 40,000 4 140,000 25,000 a) Calculate the NPV of each project at discount rates of 0%, 5%, 10%, and 15%). b) Calculate the incremental IRR (i.e., the cross-over rate) and construct an NPV profile graph to illustrate how the choice between the projects depends on the discount rate. Indicate when you should accept each project, making sure that you are explicit about the conclusions to be drawn from the NPV profile and provide specific numbers. (Do X if …; do Y if …; do Z if…)
Your firm is considering two projects that are mutually exclusive. Each project will require an initial outlay of
$200,000. The
Time Project A Project B
0 -220,000 -220,000
1 -25,000 120,000
2 80,000 80,000
3 100,000 40,000
4 140,000 25,000
a) Calculate the
b) Calculate the incremental
the choice between the projects depends on the discount rate. Indicate when you should accept each project, making
sure that you are explicit about the conclusions to be drawn from the NPV profile and provide specific numbers. (Do
X if …; do Y if …; do Z if…)
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