Chapter 11 Problems

# Chapter 11 Problems - Chapter 11 Problems A company is...

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Chapter 11 Problems A company is analyzing two mutually exclusive project, S and L, whose cash flows are as follows: 0 1 2 3 4 S -1,000 900 250 10 10 L -1,000 0 250 400 800 The company’s cost of capital is 10% and it can get an unlimited amount of capital at that cost. What is the IRR of the better project? What is the crossover rate and what is its significance? NPVs = 39.14 IRRs = 13.49% CF0 = -1000 Frequency = 1 CO1 = 900 Frequency = 1 CO2 = 250 Frequency = 1 CO3 = 10 Frequency = 2 CPT NPV I=10 CPT, answer is 39.14 Then, CPT IRR CPT, answer is 13.49 Or, npv(10,-1000,{900,250,10,10}), answer is 39.14 Irr(-1000,{900,250,10,10}), answer is 13.49 NPV(l) = 53.55 IRR(l) = 11.74% Using NPV, choose L. Using IRR, choose S When there is a conflict, go with NPV. Finding the crossover rate: 0 1 2 3 4 S -1,000 900 250 10 10 L -1,000 0 250 400 800 Difference 0 900 0 -390 -790 IRR = 10.73% NPV = -14.41 (Choose L) If NPV is negative, choose the project at the bottom of the subtraction (L) If NPV is positive, choose the project at the top of the subtraction NPVs at 10.73% = 30.7 NPV(l) at 10.73% = 30.7 Both project S and L have the same NPV at a discount rate of 10.73, the crossover point.

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