Cochran Corporation has a weighted average cost of capital of 11% for projects of average risk.Projects...

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Cochran Corporation has a weighted average cost of capital of11% for projects of average risk.Projects of below average riskhave a cost of capital of 9% , while projects of above risk have acost of capital   equal to 13%.Projects A and B aremutually exclusive,whereas   all other projects areindependent.None of the projects will be repeated.The followingtable summarizes the cash flows, IRRs and risk levels of theprojects.Which projects will the firm select for investment usingboth NPV and IRR criteria ?
Year(t)              Project A         ProjectB      ProjectC      ProjectD         Project E
  0                   $-200,000          -100,000     -100,000       -100,000        -100,000
  1                         66,000              30,000        30,000           30,000           40,000
  2                         66,000              30,000         30,000          30,000           25,000
  3                         66,000              40,000        30,000           40,000           30,000
  4                         66,000              40,000        40,000           50,000           35,000
IRR                      12.110%          14.038%       10.848%       16.636%         11.630%
ProjectRisk          Below                Below           Average         Above         Above
                             Average              Average                              Average        Average

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4.5 Ratings (654 Votes)

1 Project A COC 900 Year Cash Flow PVIF at 9 PV at 9 0 200000 1 200000 1 66000 091743 60550 2 66000 084168 55551 3 66000 077218 50964 4 66000 070843 46756 NPV 13822 Project B COC 900 Year Cash Flow PVIF at 9 PV at 9 0 100000 1 100000 1 30000 091743 See Answer

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Cochran Corporation has a weighted average cost of capital of11% for projects of average risk.Projects of below average riskhave a cost of capital of 9% , while projects of above risk have acost of capital equal to 13%.Projects A and B aremutually exclusive,whereas all other projects areindependent.None of the projects will be repeated.The followingtable summarizes the cash flows, IRRs and risk levels of theprojects.Which projects will the firm select for investment usingboth NPV and IRR criteria ?Year(t) Project A ProjectB ProjectC ProjectD Project E 0 $-200,000 -100,000 -100,000 -100,000 -100,000 1 66,000 30,000 30,000 30,000 40,000 2 66,000 30,000 30,000 30,000 25,000 3 66,000 40,000 30,000 40,000 30,000 4 66,000 40,000 40,000 50,000 35,000IRR 12.110% 14.038% 10.848% 16.636% 11.630%ProjectRisk Below Below Average Above Above Average Average Average Average