Reference no: EM132996009
A 3-year project, X, with an upfront cost of $12 million is expected to yield the following series of cash flows from operations: $2.40 million in year one, $2.80 million in year two, and $3.80 million in year three. At the end of year three, the project assets will be liquidated and sold for a net cash flow of $8.80 million. The required rate of return on the project is 12%.
Npv = 1343431.12
pi =1.1
rri = 16.9
mrii= 16.03
Now assume that we have another project, Y, mutually exclusive with X requiring the same rate of return with the following series of cash flows: initial outlay $12 million, expected cash flows for the next three years: $7.20 million, $5.20 million, and $4.20 million respectively.
Problem 1: Calculate the IRR of Project, Y. Compare to the IRR of Project, X. Which project is better using the IRR criterion?
Problem 2: Calculate the NPV of Project, Y. Compare to the NPV of Project, X. Which project is better using the NPV criterion?
Problem 3: Calculate the cross-over rate of the two projects.
Problem 4: If we assume that the RRR on the two projects is below the rate calculated in part, c above, would the IRR be a proper decision criterion? Why or why not?
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