Capital Budgeting Decision Criteria: NPV Profile A project's NPV profile graph intersects the Y-axis at 0% cost of capital and intersects the X-axis at the project's - Select (where NPV 0). The Y-axis Intersection point represents the project's undiscounted NPV. The point at which 2 projects' profiles cross one another is the crossover rate. The crossover rate can be found by calculating the Select of the differences in the projects' cash flows (Project Delta), A-Select- NPV profile indicates that increases in the cost of capital lead to large declines in NPV. 16 a project has most of its cash flows coming in later years, its NPV will Select sharply if the cost of capital increases; but a project whose cash flows come earlier will not be severely penalised by high capital costs. The significance of the crossover rate Is that at any cost of capital -Select-than the crossover rate, the NPV and IRR methods will provide the same conclusion for evaluating mutually exclusive projects. However, at any cost of capital Select than the crossover rate, the NPV and IRR methods conclusions will conflict. In that situation, the Select- 3 method will always provide the correct project acceptance result. Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 10% 0 2 Project A - 1,200 600 400 300 Projects -1,200 330 210 What is Project Delta's IRR? Do not round intermediate calculations. Round your answer to two decimal places. 230 410 740 What is the significance of this IRR? It is the select Bafter this point when mutually exclusive projects are considered there is no conflict in project acceptance between the NPV and IRR approaches. Review the graphs below. Select the graph that correctly represents the correct NPV profile for Projects A and B by using the following drop-down menu. NPV Profiles A IND INPY -Select- NPV Profiles B Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACCI 10%. 0 1 2 3 4 600 Project A -1,200 400 230 300 Project B -1,200 410 330 210 740 What is Project Delta's IRR? Do not round Intermediate calculations. Round your answer to two decimal places What is the significance of this IRR? It is the -Select- after this point when mutually exclusive projects are considered there is no conflict in project acceptance between the NPV and IRA approaches Review the graphs below. Select the graph that correctly represents the correct NPV profie for Projects A and B by using the following drop-down menu. NPV Profiles A NPV Profiles INPV 600 500 400 300 200 100 INP 600 500 400 3001 200 100 20 -100 200 25 30 Con of Capital 25 300 -1001 -200 -300 4001 Captal 400! - Project A - Project B Project A - Project 400 300 200 400 300 200 100 100 25 30 20 100 25 30 200 Cost of Castal -300 -4001 -Project A Project B NPV Profiles c INAY -1001 -200 300 4001 Canal 000 AZ 5002 400 300 200 100 - Project A Piget B NPV Profiles D NPV 600 500 400 300 2007 100 20 25 30 20 25 -1001 -200 -300 -400 CAN 100 -200 -300 400 Costa Project A Project B Project A - Project B ON
