Response to the following problem:
Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows:
Year Annual Operating Cash Flow Salvage Value
0 ($22,500) $22,500
1 6,250 17,500
2 6,250 14,000
3 6,250 11,000
4 6,250 5,000
5 6,250 0
a. If you were told that each project's cost of capital was 12 percent, which project should be selected? If the cost of capital was 18 percent, what would be the proper choice?
b. Construct NPV profiles for Projects A and B.
c. What is each project's IRR?
d. What is the crossover rate, and what is its significance?
e. What is each project's MIRR at a cost of capital of 12 percent? At r 18%? (Hint: Consider Period 7 as the end of Project B's life.)
f. What is the regular payback period for these two projects?
g. At a cost of capital of 12 percent, what is the discounted payback period for these two projects?