week 8 Question 4

Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points.
 
Use the following information for Questions 1 through 3: Assume you are presented with the following mutually exclusive investments whose expected net cash flows are as follows:
 
EXPECTED NET CASH FLOWS: Year Project A Project B 0 −$400 −$650 1 −528 210 2 −219 210 3 −150 210 4 1,100 210 5 820 210 6 990 210 7 −325 210
 
1. (a)  What is each project’s IRR? (b) If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice?
 
2. (a)  What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B’s life.)
 
3. What is the crossover rate, and what is its significance?

Use the following information for Question 4: The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for a new manufacturing process: Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the estimated salvage values. Porter’s cost of capital for an average-risk project is 10%.
 
Net After-Tax Cash Flows Year  P = 0.2   P = 0.6   P = 0.2 0   −$100,000   −$100,000   −$100,000 1  20,000   30,000   40,000 2  20,000   30,000   40,000 3  20,000   30,000   40,000 4  20,000   30,000   40,000 5  20,000   30,000   40,000 5*  0   20,000   30,000
 
4. Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected values for the net cash flow in each year.)