We have two mutually exclusive investments with the following cash flows: Year Investment A Investment B 0 -$100 -$100 1 50 20 2 40 40 3 40 50 4 30 60
a. Using a financial calculator, calculate the IRR for each of the investments.
b. Based on the IRR rule and a required return of 15%, which investment should we choose?
c. Calculate the NPV profile for each investment, using the discount rates of 0%, 5%, 10%, 15%, 20%, and 25%. Perform this task in an Excel spreadsheet. Cautionary note: If you use the =NPV() function in Excel to calculate the NPVs, it will provide incorrect answers. The NPV() function actually calculates the present value of all cash inflows. The NPV should be calculated as =NPV(all cash inflows) – initial cash outflow.
d. Plot the NPV profile for both projects using the X-Y scatter function in Excel.
e. If the required return on this project is 16%, would both NPV and IRR give us the same conclusion? Explain your answer.
f. If the required return on this project is 9%, would both NPV and IRR give us the same conclusion? Explain your answer.
h. Calculate the crossover rate at which we are indifferent between the two investments.
