Use the following information for Questions 1 through 3: Assume you are presented with the following mutually exclusive investments whose expected...

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 fo 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.)