Build a Model Solution
Chapter: 10
Problem: 23
Expected Net Cash Flows
Time Project A Project B
0($375) ($575)
1($300) $190
2($200) $190
3($100) $190
4$600 $190
5$600 $190
6$926 $190
7($200) $0
$226.96 $206.17
0% $951.00 $565.00
2% $790.31 $489.27
4% $648.61 $421.01
6% $523.41 $359.29
8% $412.58 $303.35
10% $314.28 $252.50
12% $226.96 $206.17
14% $149.27 $163.85
16% $80.03 $125.10
18% $18.24 $89.54
20% ($36.98) $56.85
22% ($86.39) $26.71
24% ($130.65) ($1.11)
26% ($170.34) ($26.85)
28% ($205.97) ($50.72)
30% ($237.98) ($72.88)
c. What is each project's IRR?
11/26/2018
Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows:
a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is
the proper choice?
-$400
-$200
$0
$200
$400
$600
$800
0% 5% 10% 15% 20% 25% 30%
Cost of Capital
Project A
Project B
IRR B = 23.92%
d. What is the crossover rate, and what is its significance?
Cash flow
Time differential
0$200
1 ($490)
2 ($390) Crossover rate = 13.14%
3 ($290)
4$410
5$410
6$736 $182
7 ($200)
@ 12% cost of capital @ 18% cost of capital
MIRR A = 15.43% MIRR A = 18.34%
MIRR B = 17.87% MIRR B = 20.88%
f. What is the regular payback period for these two projects?
4.625
Project B
3.026
Payback using PERCENTRANK 3.026 Ok because cash flows follow normal pattern.
g. At a cost of capital of 12%, what is the discounted payback period for these two projects?
5.323
Project B
Payback using intermediate calculations
e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? Hint: note that B is a 6-year project.
The crossover rate represents the cost of
capital at which the two projects value, at
a cost of capital of 13.14% is:
Payback using intermediate calculations
3.983
Discounted Payback using PERCENTRANK 3.983 Ok because cash flows follow normal pattern.
h. What is the profitability index for each project if the cost of capital is 12%?
Payback using intermediate calculations