Corporate Financial Management

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?

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