# Chapter 4 Building Model Essay

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Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows: Expected Net Cash Flows Time 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 project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the proper choice?" @ 12% cost of capital @ 18% cost of capital Use Excel's NPV function as explained in this chapter's Tool Kit. Note that…show more content…
We find the internal rate of return with Excel's IRR function: IRR A = 18.64% Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs. IRR B = 23.92% d. What is the crossover rate, and what is its significance? Cash flow Time differential 0 \$200 1 (\$490) 2 (\$390) Crossover rate = 13.14% 3 (\$290) 4 \$410 "The crossover rate represents the cost of capital at which the two projects have the same net present value. In this scenario, that common net present" 5 \$410 6 \$736 value, at a cost of capital of 13.14% is: \$182 7 (\$200) "e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? (Hint: Consider Period 7 as the end of Project B's life.)" @ 12% cost of capital @ 18% cost of capital MIRR A = 15.43% MIRR A = 18.34% MIRR B = 17.01% MIRR B = 20.47% f. What is the regular payback period for these two projects? Project A Time period 0 1 2 3 4 5 6 7 Cash flow (375) (300) (200) (100) 600 \$600 \$926 (\$200) Cumulative cash flow (375) (675) (875) (975) (375) 225 1,151 951 Payback 4.625 Project B Time period 0 1 2 3 4 5 6