Garage, Inc., has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$43,500 -$43,500 1 21,400 6,400 2 18,500 14,700 3 13,800 22,800 4 7,600 25,200 What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct? If the required return is 11 percent, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule? Over what range of discount rates would the company choose project? A? Project B? At what discount rate would the company be indifferent between these two projects? Explain.
Garage, Inc., has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$43,500 -$43,500 1 21,400 6,400 2 18,500 14,700 3 13,800 22,800 4 7,600 25,200 What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct? If the required return is 11 percent, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule? Over what range of discount rates would the company choose project? A? Project B? At what discount rate would the company be indifferent between these two projects? Explain.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 15P
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Question
Garage, Inc., has identified the following two mutually exclusive projects:
Year |
Cash Flow (A) |
Cash Flow (B) |
0 |
-$43,500 |
-$43,500 |
1 |
21,400 |
6,400 |
2 |
18,500 |
14,700 |
3 |
13,800 |
22,800 |
4 |
7,600 |
25,200 |
- What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct?
- If the required return is 11 percent, what is the
NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule? - Over what range of discount rates would the company choose project? A? Project B? At what discount rate would the company be indifferent between these two projects? Explain.
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