Submitted by: Submitted by hin7261995
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Words: 886
Pages: 4
Category: Business and Industry
Date Submitted: 03/27/2016 12:12 AM
You are considering the following two mutually exclusive projects. The crossover point is _____ and project _____ should be accepted at an 18 percent discount rate.
a. 14.92 percent; B
b. 14.92 percent; A
c. 15.23 percent; B
d. 17.54 percent; A
e. 17.54 percent; B
90. Year Project A Project B A − B
0 -$29,000 -$29,000 $ 0
1 16,000 20,000 -4,000
2 18,000 15,000 3,000
3 17,000 15,000 2,000
Crossover point: NPVA @ 18 percent NPVB @ 18 percent
CF0 = $ 0 CF0 = -$29,000 CF0 = -$29,000
CO1 = -$4,000 CO1 = 16,000 CO1 = 20,000
CO2 = $3,000 CO2 = 18,000 CO2 = 15,000
CO3 = $2,000 CO3 = 17,000 CO3 = 15,000
IRR CPT I = 18 I = 18
17.54 percent NPV CPT NPV CPT
$7,833.37 $7,851.38
All cash flows have a frequency of one. The crossover point is 17.54 percent and project B should be selected at 18 percent.
5 Year MACRS
Year 1: 20%; Year 2: 32%; Year 3: 19.2%; Year 4: 11.52%; Year 5: 11.52%; Year 6: 5.76%.
First, we will calculate the depreciation each year, which will be:
D1 = $480,000(0.2000) = $96,000
D2 = $480,000(0.3200) = $153,600
D3 = $480,000(0.1920) = $92,160
D4 = $480,000(0.1152) = $55,296
The book value of the equipment at the end of the project is:
BV4 = $480,000 – ($96,000 + 153,600 + 92,160 + 55,296) = $82,944
The asset is sold at a loss to book value, so this creates a tax refund.
After-tax salvage value = $70,000 + ($82,944 – 70,000)(0.35) = $74,530.40
So, the OCF for each year will be:
OCF1 = $180,000(1 – 0.35) + 0.35($96,000) = $150,600.00
OCF2 = $180,000(1 – 0.35) + 0.35($153,600) = $170,760.00
OCF3 = $180,000(1 – 0.35) + 0.35($92,160) = $149,256.00
OCF4 = $180,000(1 – 0.35) + 0.35($55,296) = $136,353.60
Now we have all the necessary information to calculate the project NPV. We need to be careful with
the NWC in this project. Notice the project requires $20,000 of NWC at the...