FIN 530 Assignment 5 - NPV PDF

Preview

Summary

NPV...

Description

Running head: CRITICAL THINKING ASSIGNMENT MODULE 5 (OPTION 1)

Corporate Finance Mehnaz Tarannum FIN530-1, 20SC Critical Thinking Assignment Module 5 (Option 1) Colorado State University Global Campus Dr. Natalie Walker June 11, 2020

1

CRITICAL THINKING ASSIGNMENT MODULE 5 (OPTION 1)

2

Introduction NPV, IRR, crossover rate all are the measurement tools used in finance to determine which projects company should choose and make a proper choice. Mangers use these tools to make a proper estimation and based on that estimation projects are chosen. So, it is very important that these calculations need to almost perfect (Hanks, 2018). PS: An excel file has been attached with all the calculations Calculations Question 1 When cost of capital is 12% for each of the Projects, NPV of Project A is $226.96 and NPV of Project B is $206.17. So, in that case Project A will be chosen as it has higher NPV. When cost of capital is 18% for each of the Projects, NPV of Project A is $18.24 and NPV of Project B $89.54. So, in this case Project B will be chosen as it has higher NPV. (Note: All the calculations have been shown in the attached excel file). Question 2 NPV profiles for Project A and Project B has been shown below and all the calculations has been shown step by step in the excel file attached above.

CRITICAL THINKING ASSIGNMENT MODULE 5 (OPTION 1)

3

Question 3 IRR for both of the Projects A and B are respectively 18.64% and 23.92% when the discount rate is 12% and also 18%. Which means both of the Projects have same IRR when the discount rate is different. (Note: All the calculations have been shown in the attached excel file). Question 4 Crossover rate is a point in cost of capital where the NPV of two of the projects are equal. Crossover rate is used in capital budget analysis. It identifies the point of cost of capital of a particular company where two mutually exclusive projects generate equal NPV and equally good. If the cost of capital of a company crosses crossover rate, the attractiveness of the mutually exclusive projects changes (Jan, 2019). Crossover rate for Project A and Project B is 13.14% and the significance is the common present value of $182. (Note: All the calculations have been shown in the attached excel file) Conclusion NPV is a crucial factor in the calculation of crossover rate. Many managers of companies now a day's use graphs or profiles of NPV to make decision. IRR also use in crossover rate. Similar projects might have different volatility, crossover rates help the companies to determine which project is more profitable with similar NPV (CFI, 2020). That’s why crossover rate is very crucial.

CRITICAL THINKING ASSIGNMENT MODULE 5 (OPTION 1)

4

References CFI. (2020). Crossover rate. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/valuation/crossover-rate/ Jan, O. (2019). Crossover Rate. Retrieved from https://xplaind.com/208513/crossover-rate Hanks, G. (2018). How to Calculate a Crossover Rate. Retrieved from https://bizfluent.com/how6888173-calculate-crossover-rate.html...