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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.

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 14.00%14.00%
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's IRR
Proj. N's IRR
1.b.(6 points) Caluclate each project's NPV.
Proj. A's NPV
Proj. B'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's NPV Proj. B'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
10.20
20.32
30.19
40.12
50.11
60.06
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=

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