Answered step by step
Verified Expert Solution
Question
1 Approved Answer
2. Suppose you have the following two mutually exclusive projects that you can carry out on the corner of 39th Street and Walnut Street: Build
2. Suppose you have the following two mutually exclusive projects that you can carry out on the corner of 39th Street and Walnut Street: Build a day care center or a health spa. Suppose the day care center has the following cash ows: An immediate cash outlay of $5,000 followed by inows of $2500 in each of the next 3 years and zero thereafter. Suppose the health spa has the following cash ows: An immediate outlay of $5000 followed by inows of nothing in year one, $1,000 in year 2 and $7,100 in year 3 and zero thereafter. Answer the following questions: (a) Show that the IRR of the day care project is 23.4%. Is the IRR for the health spa lower or higher than the IRR for the day care project? (b) If you base your investment decision on which investment has the highest NPV, which do you choose when the discount rate is 15% and which do you choose if the discount rate is 5%? (0) Suppose you could triple the size of the health spa project and triple its revenues but you can't change the size of the day care center. Would any of your answers in (1) or (2) change
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started