Ch10 P23 Build a Model

# Ch10 P23 Build a Model - Chapter 10 Chapter 10 P23 Build a...

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4/16/2010 Chapter 10. Chapter 10 P23 Build a Model Expected Net Cash Flows Time Project A Project B 0 (\$375) (\$575) 1 (\$300) \$190 2 (\$200) \$190 3 (\$100) \$190 4 \$600 \$190 5 \$600 \$190 6 \$926 \$190 7 (\$200) \$0 @ 12% cost of capital @ 18% cost of capital WACC = 12% WACC = 18% b. Construct NPV profiles for Projects A and B. Project A Project B \$0.00 \$0.00 0% \$0.00 \$0.00 2% \$0.00 \$0.00 4% \$0.00 \$0.00 6% \$0.00 \$0.00 8% \$0.00 \$0.00 10% \$0.00 \$0.00 12% \$0.00 \$0.00 14% \$0.00 \$0.00 16% \$0.00 \$0.00 18% \$0.00 \$0.00 20% \$0.00 \$0.00 22% \$0.00 \$0.00 24% \$0.00 \$0.00 26% \$0.00 \$0.00 28% \$0.00 \$0.00 30% \$0.00 \$0.00 c. What is each project's IRR? We find the internal rate of return with Excel's IRR function: Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs. d. What is the crossover rate, and what is its significance? Cash flow Time differential 0 1 2 Crossover rate = 3 4 5 6 value, at a cost of capital of 13.14% is: 7 @ 12% cost of capital @ 18% cost of capital f. What is the regular payback period for these two projects? Project A
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