Question
A tire manufacturing firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not
A tire manufacturing firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. What is the cost of capital at which the decision to take project L (or S) based on NPV will contradict the decision based on IRR method? Hint: Calculate the crossover rate and explain how the crossover rate would influence your decision to take project L or project S based on NPV vs. IRR? Show your excel work and thoroughly explain to earn your full points. See cash flows below:
Year | 0 | 1 | 2 | 3 | 4 |
Project S: CFS | -$2,050 | $770 | $780 | $790 | $795 |
Project L: CFL | -$4,300 | $1,400 | $1,510 | $1,520 | $1,530 |
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