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Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points.

Use the following information for Questions 1 through 3:

Assume you are presented with the following mutually exclusive investments whose expected net cash flows are as follows:

EXPECTED NET CASH FLOWS:
Year Project A Project B
0 −\$400 −\$650
1 −528 210
2 −219 210
3 −150 210
4 1,100 210
5 820 210
6 990 210
7 −325 210

1. (a) What is each project’s IRR?

(b) If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice?

2. (a) What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B’s life.)

3. What is the crossover rate, and what is its significance?

Use the following information for Question 4:

The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for a new manufacturing process:

Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the estimated salvage values. Porter’s cost of capital for an average-risk project is 10%.

Net After-Tax Cash Flows
Year P = 0.2 P = 0.6 P = 0.2
0 −\$100,000 −\$100,000 −\$100,000
1 20,000 30,000 40,000
2 20,000 30,000 40,000
3 20,000 30,000 40,000
4 20,000 30,000 40,000
5 20,000 30,000 40,000
5* 0 20,000 30,000

4. Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected values for the net cash flow in each year.)