Ch10 P23 Build a Model - 4/16/2010 Chapter 10. Chapter 10...

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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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