12-3: Net Present Value (NPV) 12-4: Internal Rate of Return (IRR) Problem 12-13 VPV and IRR Analysis Cummings Products is considering two mutually exclusive investments whose expected net cash flows are as follows: EXPECTED NET CASH FLOWS Year Project A Project B 0 -$400 -$290 -387 134 -193 134 134 134 600 134 850 134 1 -180 134 a. Construct NPV profiles for Projects A and B. Select the correct graph. NPVS) | NPVS) | NPVS) | NPVS) 1 Project A Project B 8001 Project A 800 + rect B 600 6007 4001 4001 4001 2001 2007 Project B Project A 2007 Project B 2007 Project A 20 25 20 25 20 25 15 20 25 -5 5 10 15 Cost of capital % -2007 5 5 10 15 Cost of capital %) -2007 -4001 5 5 10 15 Cost of capital %) -2007 -4001 5 10 Cost of capital % -2007 -4001 -4001 The correct graph is A . b. What is each project's IRR? Round your answers to two decimal places. Project A %% Project B c. Calculate the two projects' NPVs, if you were told that each project's cost of capital was 14%. Round your answers to the nearest cent. Project A $ Project B $ Which project, if either, should be selected? Project B Calculate the two projects' NPVs, if the cost of capital was 17%. Round your answers to the nearest cent. Project A $ Project B $ What would be the proper choice? Project By d. What is each project's MIRR at a cost of capital of 14%? (Hint: Note that B is a 7-year project.) 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: Note that B is a 7-year project.) Round your answer to two decimal places. Project A Project B e. What is the crossover rate? Round your answer to two decimal places. %% What is its significance? III I.If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections. II. The crossover rate has no significance in capital budgeting analysis. III.If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection