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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 Xaxis 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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 Summer '12
 Picou

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