Question

Year	Project A	Project B
0	-425,000	-500,000
1	200,000	280,000
2	210,000	220,000
3	175,000	180,000
4	175,000	180,000
5	175,000	180,000

1. Use the IRR approach to determine which project to choose.
2. Graph the NPV profiles for each project.
3. At what rate will the two projects have the same NPV?

Answer 1

PFB the solution..

G H I J K · Project A Project B -425,000 -500,000 200,000 280,000 210,000 220,000 175,000 180.000 175,000 180,000 175,000 180,000 12 IRR A = 13 IRR 3 = 35.16% 34.46% 15 16 Based on IRR project A should be selected. As A has higher IRR. 17 b. Construct NPV profiles for Projects A and B. 18 Project A Project B $600,000.00 $500,000.00 0% 2% 4% 6% 8% $400,000.00 10% $300,000.00 Project A Project B 12% 14% 16% 510,000 458,006 410,467 366,898 326,879 290,041 256,059 224,650 195,564 168,578 143,496 120,144 98,366 78,025 58,995 41,166 540,000 484,909 434,464 388,165 345,574 306,309 270,033 236,453 205,306 176,364 149,421 124,297 100,829 78,873 58,300 38,994 $200,000.00 18% 20% $100,000.00 24% $0.00 26% 28% 30% + 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35

40 c. Cross over rate is the rate at which project will have same NPV Time Cash flow differential $75,000.00 ($80,000.00) ($10,000.00) ($5,000.00) ($5,000.00) ($5,000.00) Crossover rate = 27.09%