1 Consider two mutually exclusive projects A and B Project A costs $700 and has cash flows of $500 in each of the next two years Project B costs $500 and has cash flows of $375 in each of the next two years a) Estimate crossover rate (incremental IRR) for these two projects b) By using the crossover rate,estimate the NPV of Project A and the NPV of Project B 2 A firm with a market value of $1,000,000 is considering a project with the following cash flows year 0 year1 year 2 year 3 year 4 year 5 75,000 10,000 19,000 30,000 41,550 50000 Demonstrate effective use of communication skills for finding the paybacby using a discount rate of 8 , and for others by using 16 (5 marks Solve the discounted payback period at each of the above discount rates (5 marks) Suppose an unsophisticated manager looked only at the ordinary, undiscounted payback period and decided to accept all projects with payback periods less than the project life Communicate clearly to help plan this manager to accept or reject the project (5 marks) If the firm decided to go forward with (i e , accept) this project, what would the firms new market value be at each of the above discount rates Communicate clearly to apply proper skills to get your conclusion with the appropriate figures (5 marks) Can you identify the discount rate at which the investment would just pay off on a discounted basis at the end of its 5 year life If so,solve that rate (5 marks)

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 17, 2024

1. Consider two mutually exclusive projects: A and B. Project A costs $700 and has cash flows of $500 in each of the next two

1. Consider two mutually exclusive projects: A and B. Project A costs $700 and has cash flows of $500 in each of the next two years. Project B costs $500 and has cash flows of $375 in each of the next two years.

a) Estimate crossover rate (incremental IRR) for these two projects?

b) By using the crossover rate,estimate the NPV of Project A and the NPV of Project B.

2. A firm with a market value of $1,000,000 is considering a project with the following cash flows.

year 0	year1	year 2	year 3	year 4	year 5
-75,000	-10,000	19,000	30,000	41,550	50000

Demonstrate effective use of communication skills for finding the paybacby using a discount rate of 8%, and for others by using 16%. (5 marks
Solve the discounted payback period at each of the above discount rates.(5 marks)
Suppose an unsophisticated manager looked only at the ordinary, undiscounted payback period and decided to accept all projects with payback periods less than the project life.Communicate clearly to help plan this manager to accept or reject the project?(5 marks)
If the firm decided to go forward with (i.e., accept) this project, what would the firms new market value be at each of the above discount rates? Communicate clearly to apply proper skills to get your conclusion with the appropriate figures. (5 marks)
Can you identify the discount rate at which the investment would just pay off on a discounted basis at the end of its 5-year life? If so,solve that rate.(5 marks)