Question: Miller Electronics is considering two new investments. Project C calls for the purchase of a coolant recovery system. Project H represents an investment in a heat recovery system. The firm wishes to use a NPV profile in comparing the projects. The investment & cash flow patterns are as follows:
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Project C
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Project H
|
|
($25,000 investment)
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($25,000 investment)
|
|
Year
|
Cash Flow
|
Year
|
Cash Flow
|
|
1
|
$6,000
|
$1
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$20,000
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|
2
|
7,000
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2
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6,000
|
|
3
|
9,000
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3
|
5,000
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|
4
|
13,000
|
|
|
[A] If the two projects are not mutually exclusive, what would your acceptance or rejection decision be if the cost of capital (discount rate) is 8 percent? (Use the net present value profile for your decision; no actual numbers are necessary.)
[B] If the two projects are mutually exclusive (the selection of one precludes the selection of the other), what would be your decision if the cost of capital is (1) 5%, (2) 13%, (3) 19%? Use the net present value profile for your answer.
[C] Calculate the NPV of the projects based on a zero discount rate.
[D] Calculate the net present value of the projects based on a nine percent discount rate.
[E]The internal rate of return on Project C is 13.01%, and the internal rate of return on Project H is 15.68%. Graph a net present value profile for the two investments similar to Figure 12-3. [Use a scale up to $10,000 on the vertical axis, with $2,000 increments. Use a scale up to 20% on the horizontal axis, with 5 percent increments.]