Question

A project's NPV profile graph intersects the Y-axis at 0% cost of capital and intersects the X-axis at the project's Select (where NPV = 0). The Y-axis intersection point represents the project's undiscounted NPV. The point at which 2 projects' profiles cross one another is the crossover rate. The crossover rate can be found by calculating the Select of the differences in the projects' cash flows (Project Delta). A Select NPV profile indicates that increases in the cost of capital lead to large declines in NPV. If a project has most of its cash flows coming in later years, its NPV will -Select- sharply if the cost of capital increases; but a project whose cash flows come earlier will not be severely penalized by high capital costs. The significance of the crossover rate is that at any cost of capital -Select v than the crossover rate, the NPV and IRR methods will provide the same conclusion for evaluating mutually exclusive projects. However, at any cost of capital -Select than the crossover rate, the NPV and IRR methods conclusions will conflict. In that situation, the Select method will always provide the correct project acceptance result. Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4 year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 10%.

Answer 1

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C w ENG 22:49 30-07-2020 99+ 28 x AFU135 fc . AFI AFJ AFL AFM AFN AFO AFP AFQ AFR AFS AFT AFU AFV AFW AFX AFK blanks 114 IRR 115 CROSSOVER RATE 116 117 IRR STEEP DECLINE 118 119 GREATER 120 LESS NPV 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 120 IRRnpvbeta HPR GMAM EAC MACRS RELEVANT Ml-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN ... +