West Coast Company is considering two mutually exclusive projects, the project's expected net cash flows are as follows: Expected Cash Flows

Year Proj. A Proj. B

$0($$$40,000)($$$30,000)$

$1($$$12,000)$ $$8,500$

$2$ $$10,000$ $$8,500$

$3$ $$35,000$ $$8,500$

$4$ $$14,000$ $$8,500$

$5$ $$25,000$ $$8,500$

Required Rate of Return $14\mathrm{.}00\%14\mathrm{.}00\%$

$1.$a$.(6$ points$)$ Calculate each project's IRR $($IRR should be denoted as a percentage number, and two numbers are kept after the decimal point$).$

Proj.A$\text{'}$s IRR

Proj. N$\text{'}$s IRR

$1.$b$.(6$ points$)$ Caluclate each project's NPV$.$

Proj. A$\text{'}$s NPV

Proj. B$\text{'}$s NPV

$1.$c$.(6$ points$)$ Calculate the crossover rate of these two projects.

Year Proj. A Proj. B Cash Flow Difference between Proj. A & Proj. B

$0$

$1$

$2$

$3$

$4$

$5$

Crossover rate

$1.$d$.(9$ points$)$ Draw the two project's NPV profile

Hint: you can assume the required rate of return on the projects ranges from $0\%$ to $30\%,$ find NPV of each project under each required rate of return, then draw the chart based on such information.

Use vertical axis to denote bond price, and horizontal axis to denote bond yield.

Required rate of return Proj. A$\text{'}$s NPV Proj. B$\text{'}$s NPV Chart:

$0\%$

$2\%$

$4\%$

$6\%$

$8\%$

$10\%$

$12\%$

$14\%$

$16\%$

$18\%$

$20\%$

$22\%$

$24\%$

$26\%$

$28\%$

$30\%$

INPUT DATA:

Base price $$260,000$

Modifications $$15,000$

Increase in NWC $$22,500$

Increase in sales revenue $$140,000$

Increase in Operating costs $$65,000$

Salvage value $$12,500$

Required rate of return $10\%$

Tax rate $40\%$

MACRS class life $($years$)5$

Useful life $($years$)6$

$2.$a$.(5$ points$)$ Estimate the initial investment outlay

Base price

Modification

Increase in NWC

Initial investment outlay

$2.$b$.(5$ points$)$ Estimate dereciation expense and ending book value each year.

Depreciation Basis $=$

Year MACRS Rate Depreciation Ending Book Value

$10\mathrm{.}20$

$20\mathrm{.}32$

$30\mathrm{.}19$

$40\mathrm{.}12$

$50\mathrm{.}11$

$60\mathrm{.}06$

$2.$ c$.(5$ points$)$ Estimnate the net salvage value

Cash flow from sale of asset

Tax effect of sale

Net salvage value cash flow

$2.$ d$.(8$ points$)$ Estimate the total after$-$tax net cash flow per year.

Year $0123456$

Increase in Sales revenue $$0$ $$140,000$ $$140,000$ $$140,000$ $$140,000$ $$140,000$ $$140,000$

Increase in Operating costs $$0$ $$65,000$ $$65,000$ $$65,000$ $$65,000$ $$65,000$ $$65,000$

Deprecation on new asset $$0$

Net operating income $$0$

Taxes $$0$

Net income $$0$

Deprecation $$0$

Incremental operating cash flow $$0$

Return of NWC $$0$ $$0$ $$0$ $$0$ $$0$ $$0$ $$22,500$

Net Salvage value $$0$ $$0$ $$0$ $$0$ $$0$ $$0$

Net after$-$tax cash flow

$2.$e$.(5$ points$)$ Calculate the project's NPV and IRR.

NPV$=$

IRR$=$