Suppose you are evaluating two mutually exclusive projects, Thing 1 and Thing 2, with the following cash flows:

a. If the cost of capital on both projects is 5%, which project, if any, would you choose? Why?

b. If the cost of capital on both projects is 8%, which project, if any, would you choose? Why?

c. If the cost of capital on both projects is 11%, which project, if any, would you choose? Why?

d. If the cost of capital on both projects is 14%, which project, if any, would you choose? Why?

e. At what discount rate would you be indifferent between choosing Thing 1 and Thing 2?

f. On the same graph, draw the investment profiles of Thing 1 and Thing 2.

Indicate the following items:

■ crossover discount rate

■ NPV of Thing 1 if the cost of capital is 5%

■ NPV of Thing 2 if cost of capital is 5%

■ IRR of Thing 1

■ IRR of Thing 2

Transcribed Image Text:

End of Year Cash Flows Year Thing 1 Thing 2 2000 -$10,000 -$10,000 2001 3,293 0 2002 3,293 0 2003 3,293 0 2004 3,293 14,641