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The Light Blue Bedding Company is considering two new products for addition to its existing offerings. The products are considered mutually exclusive, since they appeal
The Light Blue Bedding Company is considering two new products for addition to its existing offerings. The products are considered mutually exclusive, since they appeal to the same target market. The projected cash flow streams are below.
YearProduct AProduct B
0-$17,000-$17,000
18,0002,000
27,0005,000
35,0009,000
43,0009,500
a. Calculate the internal rate of return for each project.
b. Calculate the NPV for each project at 0, 5, 10, 15, 20, 25, and 30%. Use your results to plot the NPV profile graphs. Be sure to identify the IRR for each project on the graph.
c. If the firms WACC is 8%, which product is preferable?
d. If the firms WACC is 14%, which product is preferable?
e. Calculate the crossover rate, and explain in words what it represents.
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