Consider the following two mutually exclusive projects:
Cash Flows ($) | ||||
Project | C0 | C1 | C2 | C3 |
A | -100 | +60 | +60 | 0 |
B | -100 | 0 | 0 | +140 |
a. Calculate the NPV of each project for discount rates of 0, 10, and 20%. Plot these on a graph with NPV on the vertical axis and discount rate on the horizontal axis, j
b. What is the approximate IRR for each project?
c. In what circumstances should the company accept project A?
d. Calculate the NPV of the incremental investment (B - A) for discount rates of 0, 10, and 20%. Plot these on your graph. Show that the circumstances in which you would accept A are also those in which the IRR on the incremental investment is less than the opportunity cost of capital.
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