Answer to Question #209406 in Financial Math for onmo

Question

Suppose you are evaluating two mutually exclusive projects, Thing 3 and Thing 4, with the following cash flows:

Thing 3 Thing 4 2000 −$10,000 −$10,000 2001 3,503 0 2002 3,503 0 2003 3,503 0 2004 3,503 19,388 End-of-year cash flows Year

(a)

If the cost of capital on both projects is 5%, which project, ifany, would you choose? Why?

(b)

If the cost of capital on both projects is 10%, which project, ifany, would you choose? Why?

(c)

If the cost of capital on both projects is 15%, which project, ifany, would you choose? Why?

(d)

If the cost of capital on both projects is 20%, which project, ifany, would you choose? Why?

(e)

At what discount rate would you be indifferent between choosing Thing 3 and Thing 4?

(f)

On the same graph, draw the investment profiles of Thing 3 and Thing 4. Indicate the following items:

•

cross-over discount rate

•

NPV of Thing 3 if the cost of capital is 10%

•

NPV of Thing 4 if the cost of capital is 10%