Question
You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 7 percent? What
You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 7 percent? What if the discount rate is 10 percent?
| Year | Project A | Project B |
| 0 | -$275,000 | -$202,000 |
| 1 | 0 | 113,600 |
| 2 | 0 | 81,900 |
| 3 | 360,000 | 47,000 |
1. Radiology Associates is considering an investment which will cost $259,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $58,000. This inflow will increase to $150,000 and then $200,000 for the following two years before ceasing permanently. The firm requires a 14 percent rate of return and has a required discounted payback period of three years. Accept or reject this project? Why?
2. You are analyzing the following two mutually exclusive projects and have developed the following information. What is the crossover rate?
| Year | Project A Cash Flow | Project B Cash Flow |
| 0 | $-80,300 | $-77,900 |
| 1 | $25,500 | $25,000 |
| 2 | $14,000 | $13,000 |
| 3 | $47,800 | $46,000 |
3. A proposed project lasts 3 years and has an initial investment of $500,000. The after tax cash flows are estimated at $120,000 for year 1, $240,000 for year 2, and $240,000 for year 3. The firm has a target debt/equity ratio of 0.6. The firms cost of equity is 15% and its cost of debt is 8%. The tax rate is 35%. What is the NPV of this project? (hint: remember that the D/E is saying that debt is 60% of equity. In other words, you need to find D/A and E/A for the appropriate weights using the formulas: D/E/(1+ D/E) =% or weight of debt and 1/(1+D/E) = % or weight of equity.)
4. Puppy Inc. has the following mutually exclusive investment opportunities. If the appropriate discount rate was 15% what should you do?
| Year | Project X | Project Y |
| 0 | -500 | -800 |
| 1 | 100 | 500 |
| 2 | 475 | 350 |
| 3 | 50 | 350 |
A. Calculates each projects payback period cutoff. Which would you accept if Puppys payback period cutoff is 2 years?
B. Calculate each projects discounted payback period cutoff. Which would you accept if Puppys payback period cutoff is 2 years?
C. What is the NPV for each project?
5. Consider the following two mutually exclusive projects.
| Time | Project A | Project B |
| 0 | -$300 | -$405 |
| 1 | -$387 | $134 |
| 2 | -$193 | $134 |
| 3 | -$100 | $134 |
| 4 | $600 | $134 |
| 5 | $600 | $134 |
| 6 | $850 | $134 |
| 7 | -$180 | $0 |
What is each projects MIRR with a cost of capital of 12%? Which project should be selected?
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