Consider the following projects, X and Y where the firm can onlychoose one. Project X costs $1500 and has cash flows of $678, $652,$347, $111, $54, $16 in each of the next 6 years. Project Y alsocosts $1500, and generates cash flows of $738, $693, $405 for thenext 3 years, respectively. WACC=9.5%.
A) Draw the timelines for both projects: X and Y.
B) Calculate the projects’ NPVs, IRRs, payback periods.
C) If the two projects are independent, which project(s) shouldbe chosen?
D) If the two projects are mutually exclusive, which projectsshould be chosen?
E) Plot NPV profiles for the two projects. Identify theprojects’ IRRs on the graph.
F) If the WACC were 5.5 percent, would this change yourrecommendation if the projects were
mutually exclusive? If the WACC were 16.5 percent, would thischange your recommendation? Explain your answers.
G) There is a “crossover rate” of X’s and Y’s NPV curves, andmark it on the graph with Point O. Explain in words what this rateis and how it affects the choice between mutually exclusiveprojects.
H) If it possible for conflicts to exist between the NPV and theIRR when independent projects are being evaluated? Explain youranswer.
