NPVA NPVB 8 Expected Net Cash Flows 9 Time Project A Project B 10 0 ($375) ($575) 11 1 ($300) $190 12 2 ($200) $190 13 3 ($100) $190 14 4 $600 $190 15 5 $600 $190 16 6 $926 $190 17 7 ($200) $0 18 19 a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project 20 is the proper choice? 21 22 @ 12% cost of capital @ 18% cost of capital 23 Use Excel's NPV function as explained in 24 WACC = 12% WACC = 18% this chapter's Tool Kit. Note that the 25 range does not include the costs, which 26 NPVA are added separately. 27 28 NPV - 29 30 At a cost of capital of 12%, Project A should be selected. However, if the cost of capital rises to 18%, then the choice is 31 reversed, and Project B should be accepted. 32 33 D. Construct NPV profiles for Projects A and B. 34 35 Before we can graph the NPV profiles for these projects, we must create a data table of project NPVs relative to 36 differing costs of capital. 37 38 Project A Project B 39 40 0% 41 2% 42 4% 43 6% Project A 8% 45 10% 46 12% 47 14% 48 16% 49 18% 50 Project B 20% 51 22% 52 24% 53 26% 54 28% 55 30% 56 44 c. What is each project's IRR? We find the internal rate of return with Excel's IRR function: IRRA Note in the graph above that the X-axis intercepts are equal to the two IRR B - d. What is the crossover rate, and what is its significance? Cash flow differential Time 0 1 2 3 4 5 6 7 UN Crossover rate- The crossover rate represents the cost of capital at which the two projects value, at a cost of capital of 13.14% is: 1. What is the regular payback period for these two projects? Project A Time period Cash flow Cumulative cash flow 0 (375) 1 (300) 2 (200) 3 (100) 4 5 600 $600 6 7 $926 ($20 Intermediate calculation for payback 0 -$575 1 $190 2 $190 5 Payback using intermediate calculations 5 - Project B 3 Time period Cash flow Cumulative cash flow Intermediate calculation for payback 2 Payback using intermediate calculations 3 Payback using PERCENTRANK 4 5 3 $190 4 5 6 $190 $190 $190 7 $0 Ok because cash flows follow normal pattern