Question
Answer the following questions. A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below: Year 0 Year 1
Answer the following questions.
A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below:
Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
---|---|---|---|---|---|
Cashflow for S | -200 | 150 | 100 | 10 | 10 |
Cashflow for L | -200 | 10 | 10 | 100 | 250 |
Assume the company can get an unlimited amount of capital at that cost.
WACC | NPV (S) | NPV (L) |
---|---|---|
5% | ||
10% | ||
15% | ||
20% | ||
25% |
What is the internal rate of return (IRR) for Project S? Project L? If the companys cost of capital is 5% which project will you choose based on IRR?
Select one:
a. 22.07%, 18.91%, S
b. 19.93%, 15.67%, L
c. 10.00%, 22.55%, L
d. 20.12%, 18.91%, S
e. 22.07%, 17.54%, L
Continued from previous question. If the companys cost of capital is 10%, what is the net present value of each Project? Whats the profit foregone if IRR method is used?
Select one:
a. NPVS = $33.35, NPVL = $63.24, $29.89
b. NPVS = $100.81, NPVL = $112.45, $11.25
c. NPVS = $78.81, NPVL = $60.24, $35.51
d. NPVS = $63.24, NPVL = $33.35, $-29.89
e. NPVS = $82.26, NPVL = $75.63, $3.97
Continued from previous question. Which of the following statements is correct?
Select one:
a. The crossover rate should be between 15 and 20%.
b. If the WACC is smaller than the crossover rate, you will choose project S using the NPV method.
c. If the WACC is larger than the crossover rate, a conflict arises between the NPV and the IRR methods.
d. The crossover rate should be between 20% and 25%.
e. The crossover rate should be smaller than 10%.
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