1. We have two mutually exclusive investments with the following cash flows: (13 marks total) Year Investment A Investment B 0 -$100 -$100 1 50 20 2 40 40 3 40 50 4 30 60 Using...

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Finance

1. We have two mutually exclusiveinvestments with the following cash flows: (13 markstotal)
Year
Investment A
Investment B
0
-$100
-$100
1
50
20
2
40
40
3
40
50
4
30
60
Using a financial calculator, calculate the IRR for each of theinvestments. (1 mark)
b. Based on the IRR rule and arequired return of 15%, which investment should we choose?
c. Calculate the NPV profile for eachinvestment, using the discount rates of 0%, 5%, 10%, 15%, 20%, and25%. Perform this task in an Excel spreadsheet. Cautionarynote: If you use the =NPV() function in Excel to calculatethe NPVs, it will provide incorrect answers. The NPV() functionactually calculates the present value of all cash inflows. The NPVshould be calculated as =NPV(all cash inflows) – initial cashoutflow.
d. Plot the NPV profile for bothprojects using the X-Y scatter function inExcel.
e. If the required return on thisproject is 16%, would both NPV and IRR give us the same conclusion?Explain youranswer.                                              (2.5marks)
f.   If the required returnon this project is 9%, would both NPV and IRR give us the sameconclusion? Explain youranswer.                                              (2.5marks)
h. Calculate the crossover rate atwhich we are indifferent between the twoinvestments.

Answer & Explanation Solved by verified expert

4.4 Ratings (745 Votes)

aFirst we enter the cash flows for Investment A using CF buttonin the calculatorCF 0 Enter Down Arrow 100CF 1 Enter See Answer

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1. We have two mutually exclusiveinvestments with the following cash flows: (13 markstotal)YearInvestment AInvestment B0-$100-$10015020240403405043060Using a financial calculator, calculate the IRR for each of theinvestments. (1 mark)b. Based on the IRR rule and arequired return of 15%, which investment should we choose? c. Calculate the NPV profile for eachinvestment, using the discount rates of 0%, 5%, 10%, 15%, 20%, and25%. Perform this task in an Excel spreadsheet. Cautionarynote: If you use the =NPV() function in Excel to calculatethe NPVs, it will provide incorrect answers. The NPV() functionactually calculates the present value of all cash inflows. The NPVshould be calculated as =NPV(all cash inflows) – initial cashoutflow. d. Plot the NPV profile for bothprojects using the X-Y scatter function inExcel. e. If the required return on thisproject is 16%, would both NPV and IRR give us the same conclusion?Explain youranswer. (2.5marks)f. If the required returnon this project is 9%, would both NPV and IRR give us the sameconclusion? Explain youranswer. (2.5marks)h. Calculate the crossover rate atwhich we are indifferent between the twoinvestments.

Year	Investment A	Investment B
0	-$100	-$100
1	50	20
2	40	40
3	40	50
4	30	60