# Financial Management: P11-13 Cummings Products Company is considering two mutually exclusive

Financial Management

P11-13

Cummings Products Company is considering two mutually exclusive investments. The projects’ expected net cash flows are as follows:

Expected Net Cash Flows

Year Project A Project B

0 (300.00) (405.00)

1 (387.00) 134.00

2 (193.00) 134.00

3 (100.00) 134.00

4 600.00 134.00

5 600.00 134.00

6 850.00 134.00

7 (180.00) -

a. Construct NPV profiles for Projects A and B.

b. What is each project’s IRR?

c. If you were told that each project’s cost of capital was 10%, which project should be selected? If the cost of capital was 17%, what would be the proper choice?

d. What is each project’s MIRR at a cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B’s life.)

e. What is the crossover rate, and what is its significance?

P11-13

Cummings Products Company is considering two mutually exclusive investments. The projects’ expected net cash flows are as follows:

Expected Net Cash Flows

Year Project A Project B

0 (300.00) (405.00)

1 (387.00) 134.00

2 (193.00) 134.00

3 (100.00) 134.00

4 600.00 134.00

5 600.00 134.00

6 850.00 134.00

7 (180.00) -

a. Construct NPV profiles for Projects A and B.

b. What is each project’s IRR?

c. If you were told that each project’s cost of capital was 10%, which project should be selected? If the cost of capital was 17%, what would be the proper choice?

d. What is each project’s MIRR at a cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B’s life.)

e. What is the crossover rate, and what is its significance?

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