Consider the following projects, X and Y where the firm can only choose one. Project X...

90.2K

Verified Solution

Question

Finance

Consider the following projects, X and Y where the firm can onlychoose one. Project X costs $1500 and has cash flows of $678, $652,$347, $111, $54, $16 in each of the next 6 years. Project Y alsocosts $1500, and generates cash flows of $738, $693, $405 for thenext 3 years, respectively. WACC=9.5%.
A) Draw the timelines for both projects: X and Y.
B) Calculate the projectsâ€™ NPVs, IRRs, payback periods.
C) If the two projects are independent, which project(s) shouldbe chosen?
D) If the two projects are mutually exclusive, which projectsshould be chosen?
E) Plot NPV profiles for the two projects. Identify theprojectsâ€™ IRRs on the graph.
F) If the WACC were 5.5 percent, would this change yourrecommendation if the projects were
mutually exclusive? If the WACC were 16.5 percent, would thischange your recommendation? Explain your answers.
G) There is a â€œcrossover rateâ€ of Xâ€™s and Yâ€™s NPV curves, andmark it on the graph with Point O. Explain in words what this rateis and how it affects the choice between mutually exclusiveprojects.
H) If it possible for conflicts to exist between the NPV and theIRR when independent projects are being evaluated? Explain youranswer.

Answer & Explanation Solved by verified expert

4.1 Ratings (454 Votes)

Part AProject X timelineProject Y timelinePart BNPV IRR and Payback of project XNPV is the surplus earned by a project in absolute terms afterdiscounting the cash flows by an appropriate ratein this caseWACC to its present value This can be calculated using NPVfunction on ExcelInternal rate of ReturnIRR is the discount rate that makes theNPV of all cash flows equal to Zero It can be See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member