NPV and IRR Analysis Cummings Products Company is considering two mutually exclusive investments whose expected net cash flows are as follows: EXPECTED NET CASH FLOWS Year Project A Project B 0 -$300 -$405 1 -387 134 2 -193 134 3 -100 134 4 600 134 5 600 134 6 850 134 7 -180 134 Calculate the two projects' NPVs, if the cost of capital was 17%. Do not round intermediate calculations. Round your answers to the nearest cent. Project A $ Project B $ What is each project's MIRR at a cost of capital of 10%? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answers to two decimal places. Project A % Project B % What is each project's MIRR at a cost of capital of 17%? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answer to two decimal places. Project A % Project B % What is the crossover rate? Do not round intermediate calculations. Round your answer to two decimal places. % What is its significance? I. If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection. II. If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections. III. The crossover rate has no significance in capital budgeting analysis.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 13P

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NPV and IRR Analysis

Cummings Products Company is considering two mutually exclusive investments whose expected net cash flows are as follows:

	EXPECTED NET CASH FLOWS
Year	Project A	Project B
0	-$300	-$405
1	-387	134
2	-193	134
3	-100	134
4	600	134
5	600	134
6	850	134
7	-180	134

Calculate the two projects' NPVs, if the cost of capital was 17%. Do not round intermediate calculations. Round your answers to the nearest cent.

Project A $

Project B $
What is each project's MIRR at a cost of capital of 10%? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answers to two decimal places.

Project A  %

Project B  %

What is each project's MIRR at a cost of capital of 17%? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answer to two decimal places.

Project A  %

Project B  %
What is the crossover rate? Do not round intermediate calculations. Round your answer to two decimal places.
%

What is its significance?
I. If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection.
II. If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections.
III. The crossover rate has no significance in capital budgeting analysis.

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