Today (T=0), Company Y is evaluating Project 1 and Project 2

Each projects initial cash outlay and future cash flows are forecasted below

Managements primary goal is to maximize firm value by maximizing NPV

The current cost of capital for the project is 10%

1.The crossover rate is closest to:

a. 12.6% b. 14.6% c. 15.6% d. 16.6% e. 18.6%

2.Assume managements total budget is $1000 and the cost of capital increases from 10% to 15%.

What is managements best course of action?

a. Management should only accept project 1

b. Management should only accept project 2

c. Management should accept both projects

d. Management should reject both projects

e. Insufficient information to answer this problem

3.Assume managements total budget is $1000 and the cost of capital increases from 10% to 20%. Which of the following statements is(are) TRUE:

I. The NPV of both projects is now less than 0

II. The IRR of both projects is now less than 0

III. The profitability index is now less than 0

a. I b. II c. III d. I,III e. All of the statements

Project 1 Project 2 CFO -360 -400 CF1 90 60 CF2 90 80 CF3 90 100 CF4 90 120 CF5 90 125 CF6 901 120 CF7 90 115 CF8 90 100