Group 4:

● Anissa Dian Setyarani Wokas (20/470892/PEK/26619)

● Firza Syafira (20/470938/PEK/26665)
● Puspita Ramadhania (20/471001/PEK/26728)
● Raveena Fiarani (20/471005/PEK/26732)

Assignment 4

10-11 Cummings Products is considering two mutually exclusive investments whose expected
net cash flows are as follows:

a. Construct NPV profiles for Projects A and B.

Assume cost of capital 12%

b. What is each project IRR?

IRR​A​ = 18% and IRR​B​ = 24%.

c. If you were told that each project’s cost of capital was 10%, which project, if

either, should be selected? If the cost of capital were 17%, what would be the

proper choice?

NPV = 10%

At 10% cost of capital from Project A should be chosen since it has higher NPV.
 NPV = 17%

At 17% cost of capital from Project B should be chosen since it has higher NPV.

d. What is each project’s MIRR at the cost of capital of 10%? At 17%? (​Hint:

Consider Period 7 as the end of Project B’s life.

MIRR at 10%:

MIRR​A​ = 14.07%

MIRR​B​ = 15.89%
 MIRR at 17%:

MIRR​A​ = 17.57%.

MIRR​B​ = 19.91%.

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

The black lines indicate crossover rate is 14.53%

Crossover rate is the rate at which NPV of two alternative projects is the same.

Both projects are mutually exclusive but only the one with the cost of capital

higher than the crossover rate can be selected.

11-1 Talbot Industries is considering an expansion project. The necessary equipment could be
purchased for $9 million, and the project would also require an initial $3 million
investment in net operating working capital. The company’s tax rate is 40%.

a. What is the initial investment outlay?

Equipment = $9 million

NWC Investment = $3 million

Initial investment outlay = Equipment + NWC Investment

= $9 million + $3 million =​ $12 million

b. The company spent and expensed $50.000 on research related to the project last
year. Would this change your answer? Explain

No, $50,000 will not have any impact. It is considered a sunk cost and does not
represent an incremental cash flow. Thus, they should not be included for this
analysis

c. The company plans to house the project in a building it owns but is not now
using. The building could be sold for $1 million after taxes and real estate
commissions. How would this affect your answer?

The sale of the building is being considered as the opportunity cost for conducting
this project in that building. Thus the after tax sale price should be charged
against the cost of the project.

11-2 Cairn Communications is trying to estimate the first-year operating cash flow (at t = 1)
for a proposed project. The financial staff has collected the following information

Projected sales $18 million

Operating costs (not including depreciation) $ 9 million
Depreciation $ 4 million
Interest expense $ 3 million
The company faces a 40% tax rate. What is the project’s operating cash flow for the first
year (t = 1) ?