BaM-Ch12 - Chapter 12. Chapter 12 P23 Build a Model Gardial...

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Chapter 12. Chapter 12 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 @ a 12% cost of capital @ a 18% cost of capital WACC = 12% WACC = 18% NPV A = NPV A = NPV B = NPV B = b. Construct NPV profiles for Projects A and B. Project A Project B 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 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. e. 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 13.13%, is: 7 @ a 12% cost of capital @ a 18% cost of capital f. What is the regular payback period for these two projects? Project A Time period: 0 1 2 3 4 5 6 7 Cash flow: (375) (300) (200) (100) 600 $600 $926 ($200) Cumulative cash flow: % of year required for payback:
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