Introduction
Use the following information for Questions 1 through 3:
Assume you are given these mutually exclusive investments with the expected net cash flows as in the table:
Year Project A Project B
0 -400 -670
1 -528 210
2 -219 210
3 -250 210
4 1100 210
5 820 210
6 990 210
7 -325 210
Respond to the questions:
Question 1:
What is each project’s IRR?
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?
Question 2:
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.)
Question 3:
What is the crossover rate, and what is its significance?