Answer:
1a. 7.12%
b. 6.99%
2. 9.69%
Explanation:
The IRR is the discount rate that equates the after tax cash flows from an investment to the amount invested.
The IRR can be calculated using a financial calculator.
The IRR for project X :
Cash flow in year 0 = $-16,400
Cash flow in year 1 = $6,660
Cash flow in year 2 = $7240
Cash flow in year 3= $4760
IRR = 7.12%
The IRR for project Y :
Cash flow in year 0 = $-16,400
Cash flow in year 1 = $7,190
Cash flow in year 2 = $7,780
Cash flow in year 3 = $3530
IRR = 6.99%
The cross over rate is the rate that equates the cash flow from both projects.
The first step is to subtract the cash flow from project Y from the cash flow of project X
Cash flow for year 0 = $16400 - $16400 = 0
Cash flow for year 1 = $6,660 - $7,190 = $-530
Cash flow for year 2 =$7,240 -$7,780 =$-540
Cash flow for year 3 = $4,760 - $3,530 = $1230
The next step is to find the discount rate using a financial calculator.
Cash flow for year zero = 0
Cash flow for year one = $-530
Cash flow for year 2 =$-540
Cash flow for year 3 =$1230
Cross over rate = 9.69%
I hope my answer helps you
