As the chief financial officer of the Orient Express, you are offered the following two mutually exclusive projects.
Cash Flow ($)
Year Project A Project B
0 -5,000 -100,000
1 3,500 65,000
2 3,500 65,000
a. What are the IRRs of these two projects?
b. If you are told only the IRRs of the projects, which would you choose?
c. What did you ignore when you made your decision in part (b)?
d. According to the NPV rule, which of these two projects should be pursued? Assume a 15 percent discount rate.
As the chief financial officer of the Orient Express, you are offered the following two mutually exclusive projects.
Cash Flow ($)
Year Project A Project B
0 -5,000 -100,000
1 3,500 65,000
2 3,500 65,000
a. What are the IRRs of these two projects?
b. If you are told only the IRRs of the projects, which would you choose?
c. What did you ignore when you made your decision in part (b)?
d. According to the NPV rule, which of these two projects should be pursued? Assume a 15 percent discount rate.
Related questions
NPV
Your division is considering two projects with the following cash flows (in millions):
| 0 | 1 | 2 | 3 |
| Project A | -$19 | $8 | $15 | $17 |
| Project B | -$17 | $11 | $8 | $6 |
What are the projects' NPVs assuming the WACC is 5%? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.
Project A $ {C} million
Project B $ {C} million
What are the projects' NPVs assuming the WACC is 10%? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.
Project A $ million
Project B $ million
What are the projects' NPVs assuming the WACC is 15%? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.
Project A $ {C} million
Project B $ {C} million
What are the projects' IRRs assuming the WACC is 5%? Round your answer to two decimal places.
Project A %
Project B %
What are the projects' IRRs assuming the WACC is 10%? Round your answer to two decimal places.
Project A {C}%
Project B {C}%
What are the projects' IRRs assuming the WACC is 15%? Round your answer to two decimal places.
Project A %
Project B %
If the WACC were 5% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 89.04%.)
-Select-Project AProject BNeither A, nor BItem 13
If the WACC were 10% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 89.04%.)
-Select-Project AProject BNeither A, nor BItem 14
If the WACC were 15% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 89.04%.)
-Select-Project AProject BNeither A, nor BItem 15
Romboski, LLC, has identified the following two mutually exclusive projects:
| Year | Cash Flow (A) | Cash Flow (B) | ||||||
| 0 | รขยย$ | 65,000 | รขยย$ | 65,000 | ||||
| 1 | 41,000 | 27,500 | ||||||
| 2 | 35,000 | 31,500 | ||||||
| 3 | 23,500 | 37,000 | ||||||
| 4 | 15,000 | 24,500 | ||||||
| Requirement 1: | |
| (a) | What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answer as a percentage roundedto 2 decimal places (e.g., 32.16).) |
| Internal rate of return | |
| Project A | % |
| Project B | % |
| (b) | If you apply the IRR decision rule, which project should the company accept? |
| Requirement 2: | |
| (a) | Assume the required return is 11 percent. What is the NPV for each of these projects? (Do not round intermediate calculations.Round your answers to 2 decimal places (e.g., 32.16).) |
| Net present value | |
| Project A | $ |
| Project B | $ |
| (b) | Which project will you choose if you apply the NPV decision rule? |
| Requirement 3: | |
| (a) | Over what range of discount rates would you choose Project A? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) |
| Project A |
| @ % |
| (b) | Over what range of discount rates would you choose Project B? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) |
| Project B |
| @ % |
| (c) | At what discount rate would you be indifferent between these two projects? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| Discount rate | % |
