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Description

Consider two mutually exclusive investments. The projects expected net cash are as follows. (order going down)

Year 1, Year 2, Year 3, Year 4, Year 5

Project A $(45,000) (20,000) 11,000, 20,000, 30,000, 45,000

Project B $ (50,000), 15,000, 15,000, 15,000, 15,000, 15,000

a. Construct NPV profiles for Projects A and B

b. Calculate each project’s IRR

c. If required rate for each project is 13 percent, which project should they select? If required rate of return is 9 percent, what would be the proper choice? If required rate of return is 15 percent, what would be the proper choice?

d. At what rate do the NPV profiles of the two projects cross?

e. Project A has a large cash flow in Year 5 associated with ending project. They are confident Project A’s cash flows in Years 0 to 4 but is uncertain about what it’s Year 5 cash flow will be. (There is no uncertainty for Project B’s cash flow) Under a worse case scenario, Project A’s Year 5 cash flow will be $40,000, whereas under a best-case scenario, the cash flow will be $50,000.

Redo parts A,B ,and D for each scenario, assuming a 13 percent required rate of return. If required rate of return for each project is 13 percent, which project should be selected under each scenario? (Please do all the parts in Excel)