Keller Construction is considering two new investments. Project E calls for the purchase of earth-moving equipment. Project H represents the investment in a hydraulic lift. Keller wishes to use a NPV profile in comparing the projects. The investment and cash flow patterns are as follows:

a. Determine the NPV of the projects based on a zero discount rate.
b. Determine the NPV of the projects based on a 9 percent discount rate.
c. The IRR on Project E is 13.23 percent, and the IRR on Project H is 16.29 percent. Graph a NPV profile for the two investments, similar to Figure 12-3. (Use a scale up to $8,000 on the vertical axis, with $2,000 increments. Use a scale up to 20 percent on the horizontal axis, with 5 percent increments.)

In figure 12-3

d. If the two projects are not mutually exclusive, what would your acceptance or rejection decision be if the cost of capital (discount rate) is 10 percent? (Use the NPV profile for your decision; no actual numbers are necessary.)
e. If the two projects are mutually exclusive (the selection of one precludes the selection of the other), what would be your decision if the cost of capital is
(1) 6 percent, 

(2) 13 percent, 

(3) 18 percent?

Use the NPV profile for your answer.

Transcribed Image Text:

Project E ($20,000 investment) Project H ($20,000 investment) Cash flow Year Year Cash flow $5,000 $16,000 5,000 6,000 7,000 3 3 4,000 10,000 Net present value ($) Investment C 6,000 *B Discount Rate NPV $3,200 2,381 1,563 1,002 417 10 15 4,000 Nnvestment B 22.49 25 -112 9.3% 2,000 Investment C Jnvestment C IRR: = 22.49% Investment B 5% 10% 15% 20% C 25% IRRE = 14.33% Crossover point Discount rate (percent)