Share
Explore BrainMass

Mutually Exclusive Projects

This is a homework problem from ch. 10 of "Corporate Finance: A Focused Approach (2nd ed). Please use the attached template from same book Web site. I can not get same answers as given in class. Please explain steps/formulas, verbage etc in separate Word document if possible. Thank you.

question 10-18:

Gardial Fisheries is considering 2 mutually exclusive investments. The projects expected net cash flows are as follows:

expected net cash flows
year project a project b

0 ($375) ($575)
1 (300) 190
2 (200) 190
3 (100) 190
4 600 190
5 600 190
6 926 190
7 (200) 0

a. If each projects cost of capital was 12% which project should be selected? If cost of capital was 18% what would be the proper choice?

b. construct NPV profiles for proj a and b
c. what is each projects IRR?
d. what is the crossover rate, and what is its significance?
e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? (period 7 is end of project b's life

Attachments

Solution Preview

Please see the attached file. The cell formula will explain how the figures have been input.

a. If each projects cost of capital was 12% which project should be selected? If cost of capital was 18% what would be the proper choice?

We should select the project with a higher NPV. We calculate the NPV of the two projects, using the NPV function in excel. At 12% the NPV of A is higher and so should be selected. At 18% the NPV of B is higher ...

Solution Summary

Then solution explains how to evaluate two mutually exclusive projects.

$2.19