The Xavier Motor Company makes outdoor power equipment including lawn mowers and garden tractors and is considering two diversification ventures. The first involves manufacturing a larger, more powerful tractor than the firm has made up until now. Market research indicates a substantial demand for more powerful equipment, and some competitors are already moving in that direction. The second opportunity involves building snow-blowers. The manufacturing and engineering technology required for snow-blowers is essentially the same as that for building garden equipment, but Xavier has never made snow-blowers before. Management wants to make a decision based on only 5 years of projected cash flows, because if a project isn't expected to justify itself in five years, management considers it too risky. Working with representatives from marketing, engineering and manufacturing departments, a financial analyst has put together a set of projected incremental cash flows for each project. Xavier's cost of capital is 9%. YEAR 0 1 2 3 4 5 Xavier Motor Company Project Estimates Project A TRACTOR S (3,000,000) (250,000) 500,000 1,000,000 1,500,000 1,500,000 Project B SNOWBLOWER S (3,500,000) (700,000) 800,000 1,200,000 2,000,000 2,000,000 Other information: Project B payback = 4.1 yrs. Project B NPV - $174,480 Project BIRR - 10.25% Project B MIRR - 9.90 % A financial analysis of the project situation should provide answers to the questions on the following 2 pages. Calculate Project A' payback Calculate Project A's MIRR: Calculate Projects NPV & IRR CFO - PV- Co- 02 COS (PVTV - 004- COS MIRR IY- NPV- IRR If Xavier can raise no more than $5 milion for new projects, which of these projects should be chosen? A. Both projects can be chosen B. Project A because it is cheapest C. Project because has the highest retum D. Neither project should be chosen If Xavier's management is willing to consider two more years of projected cash flows and the contributions continued at the level of the last two years. Which of the following statements is best? A. Both projects payback will decrease with the increasing cash flows. B. Both projects NPV wil go up, but their IRR will stay the same. C. Both projects will be more valuable and should be considered for financing. D. Project A will now be more valuable than Project B. Which statement does not reflect correct thinking as it relates to risk as you consider which project to choose? Which is false? A. Risk should include thoughts on qualitative fit of the project to your company. B. Risk should include validating the assumptions behind the cash flows. C. Risk should include timing of the cash flows. D. Rok is not induded in the original cost of capital given. The Xavier Motor Company makes outdoor power equipment including lawn mowers and garden tractors and is considering two diversification ventures. The first involves manufacturing a larger, more powerful tractor than the firm has made up until now. Market research indicates a substantial demand for more powerful equipment, and some competitors are already moving in that direction. The second opportunity involves building snow-blowers. The manufacturing and engineering technology required for snow-blowers is essentially the same as that for building garden equipment, but Xavier has never made snow-blowers before. Management wants to make a decision based on only 5 years of projected cash flows, because if a project isn't expected to justify itself in five years, management considers it too risky. Working with representatives from marketing, engineering and manufacturing departments, a financial analyst has put together a set of projected incremental cash flows for each project. Xavier's cost of capital is 9%. YEAR 0 1 2 3 4 5 Xavier Motor Company Project Estimates Project A TRACTOR S (3,000,000) (250,000) 500,000 1,000,000 1,500,000 1,500,000 Project B SNOWBLOWER S (3,500,000) (700,000) 800,000 1,200,000 2,000,000 2,000,000 Other information: Project B payback = 4.1 yrs. Project B NPV - $174,480 Project BIRR - 10.25% Project B MIRR - 9.90 % A financial analysis of the project situation should provide answers to the questions on the following 2 pages. Calculate Project A' payback Calculate Project A's MIRR: Calculate Projects NPV & IRR CFO - PV- Co- 02 COS (PVTV - 004- COS MIRR IY- NPV- IRR If Xavier can raise no more than $5 milion for new projects, which of these projects should be chosen? A. Both projects can be chosen B. Project A because it is cheapest C. Project because has the highest retum D. Neither project should be chosen If Xavier's management is willing to consider two more years of projected cash flows and the contributions continued at the level of the last two years. Which of the following statements is best? A. Both projects payback will decrease with the increasing cash flows. B. Both projects NPV wil go up, but their IRR will stay the same. C. Both projects will be more valuable and should be considered for financing. D. Project A will now be more valuable than Project B. Which statement does not reflect correct thinking as it relates to risk as you consider which project to choose? Which is false? A. Risk should include thoughts on qualitative fit of the project to your company. B. Risk should include validating the assumptions behind the cash flows. C. Risk should include timing of the cash flows. D. Rok is not induded in the original cost of capital given