Version A

FIN $350,24S$

$8.$ Use the information to answer the following questions. A company is analyzing two mutually exclusive projects, $S$ and $L,$ whose cash flows are shown below:

$\backslash$table$[[,,,,,],[$Cashflow for $S,$Year $0,$Year I,Year $2,10,10],[$Cashflow for L$,\backslash$table$[[-200]],\frac{150}{10},\frac{100}{10},100,250]]$

Assume the company can get an unlimited amount of capital at that cost.

$\backslash$table$[[$WACC$,$NPV $($S$),$NPV $($L$)],[5\%,,],[10\%,,],[15\%,,],[20\%,,],[25\%,,]]$

If the company's cost of capital is $10\%,$ what is the net present value of each project? What's the profit foregone if the IRR method is used?

A$)NPVS=$$$63\mathrm{.}24,NPVL=$$$33\mathrm{.}35,$$$-29\mathrm{.}89$

B$)NPVS=$$$78\mathrm{.}81,NPVL=$$$60\mathrm{.}24,$$$35\mathrm{.}51$

C$)NPVS=$$$33\mathrm{.}35,NPVL=$$$63\mathrm{.}24,$$$29\mathrm{.}89$

D$)NPVS=$$$82\mathrm{.}26,NPVL=$$$75\mathrm{.}63,$$$3\mathrm{.}97$

E$)NPVS=$$$100\mathrm{.}81,NPVL=$$$112\mathrm{.}45,$$$11\mathrm{.}25$

$9.$ Continued from previous question. If the company's cost of capital is $15\%,$ what is the net present value of each project?

Based on NPV$,$ which project will you choose?

A$)NPVS=$$$33\mathrm{.}35,NPVL=$$$63\mathrm{.}24,L$

B$)NPVS=$$$18\mathrm{.}34,NPVL=$$$24\mathrm{.}95,S$

C$)NPVS=$$$82\mathrm{.}26,NPVL=$$$75\mathrm{.}63,L$

D$)NPVS=$$$18\mathrm{.}34,NPVL=$$$24\mathrm{.}95,L$

E$)NPVS=$$$100\mathrm{.}81,NPVL=$$$112\mathrm{.}45,L$

$10.$ Continued from previous question. Which of the following statements is correct?

A$)$ The crossover rate should be between $20\%$ and $25\%.$

B$)$ The crossover rate should be smaller than $10\%.$

C$)$ If the WACC is smaller than the crossover rate, you will choose project $S$ using the NPV method.

D$)$ If the WACC is larger than the crossover rate, a conflict arises between the NPV and the IRR methods.

E$)$ The crossover rate should be between $15$ and $20\%.$

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