1.(a) What is each project’s IRR? (b) If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice?

Project a should be selected…….Proper choice would be B2. (a) What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B’s life.) 3. What is the crossover rate, and what is its significance?

b. What is each project's IRR? 20.65/25.84

c. If you were told that each project's cost of capital was 10 percent, which project should be selected? If the cost of capital was 17 percent, what would be the proper choice? Project B Project B

d. What is each projects MIRR at a cost of capital of 10 percent? At k = 17%? (Hint: Consider Period 7 as the end of Project B's life.)

e. What is the crossover rate, and what is its significance?

INPUT DATA:    KEY OUTPUT:   Graph

             

  Expected Cash

Flows          Year Proj. A Proj. B     Proj. A Proj. B

0 ($400) ($650)   NPV $479 $372 1 (528) 210   IRR 20.65% 25.84%2 (219) 210   MIRR 14.91% 17.35%3 (150) 210   PV outflows ($1,340) ($650)4 1,100 210   TV inflows $3,545 $1,992 5 820 210     14.9%  6 990 210        7 (325) 210   Crossover rate 14.76%             

Cost of capital 10.00%        

MODEL-GENERATED DATA:NPV profile:

Proj. A Proj. Bk NPV NPV

0.00% $1,288 $820 8.00% $605 $443 12.00% $366 $308 16.00% $175 $198 18.10% $91 $148 19.50% $39 $117

24.00% ($102) $31 30.00% ($245) ($62)

IRR 20.65% 25.84%

Crossover rate calculation:

Delta's Cost

ofNPV

ofYear CFs Capital Delta

0 $250 0.00% $468 1 (738) 5.00% 259 2 (429) 10.00% 106 3 (360) 11.12% 78 4 890 20.00% (85)5 610 30.00% (183)6 780 7 (535)

NPV Delta $106

IRR Delta 14.76%

Data for NPV profile graph:

Cost of Proj. A Proj. BCapital NPV NPV

$479 $372 0% $1,288 $820 2% 1,086 709 4% 906 610 6% 747 522 8% 605 443 10% 479 372 12% 366 308 14% 265 251 16% 175 198 18% 94 150 20% 22 107 22% (43) 67 24% (102) 31 26% (154) (3)28% (202) (33)30% (245) (62)