Question

You are considering the following two projects and can take only one. Your cost of capital is 11.0%. The cash flows for the two projects are as follows ($ million): Project Year 4 Year 0 - $100 - $100 Year 1 $25 $50 Year 2 $30 $40 Year 3 $40 $30 $50 $20 a. What is the IRR of each project? b. What is the NPV of each project at your cost of capital? c. At what cost of capital are you indifferent between the two projects? d. What should you do?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

А DE Cost of capital 11.0% enmoof Year 0 1 2 Project A $100.00 $25.00 $30.00 $40.00 $50.00 14.70% $9.06 Project B $100.00 $50.00 $40.00 $30.00 $20.00 17.80% $12.62 B-A $0.00 $25.00 $10.00 $10.00 $30.00 5.57% 4 IRR NPV Indifferent Cost of capital (Cross over rate) 5.57% 13 14 d. 15 16. Project-B is recommended.

Cell reference -

ДА BC Cost of capital 0.11 Year Project A Project B -A -100 5 1 25 30 40 - 100 50 40 30 B =D4-C4 =D5-C5 =D6-C6 =D7-C7 =D8-C8 20 IRR =IRR(E4:58) 9 a. b. =IRR(C4:08) =C4+NPV($C$1,C5:08) =IRR(D4:D8) =D4+NPV($C$1,D5:D8) NPV 11 Indifferent Cost of capital (Cross over rate) =E9 12 13 14 d. 15 16 Droit Project-B is recommended.

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