# 32. Net present value graph and indifference cost of capital. Specialized Consulting Service...

32.   Net present value graph and indifference cost of capital. Specialized Consulting Service Company’s after-tax net cash flows associated with two mutually exclusive projects, Alpha and Beta, are as follows:

Cash Flow, End of Year

 Project 0 1 2 Alpha $(100)$125 --- Beta (100) 50 \$84

a.    Calculate the net present value for each project using discount rates of 0, 0.04, 0.08, 0.12, 0.15, 0.20, and 0.25.

b.    Prepare a graph as follows. Label the vertical axis ‘‘Net Present Value in Dollars’’ and the  horizontal  axis  ‘‘Discount  Rate  in  Percent  per  Year.’’  Plot  the  net  present  value amounts calculated in part a. for project Alpha and project Beta.

c.    State the decision rule for choosing between projects Alpha and Beta as a function of the firm’s cost of capital.

d.    What generalizations can you draw from this exercise?