Answer:
13.28%; B
Explanation:
Project A Project B Differential
Year 0 -$21,000 Year 0 -$21,000 0
Year 1 $7,000 Year 1 $15,000 -$8,000
Year 2 $7,000 Year 2 $5,000 $2,000
Year 3 $15,000 Year 3 $7,000 $8,000
the discount rate = 14%, the NPV is:
NPV project A = -21,000 + 7,000/1.14 + 7,000/1.14² + 15,000/1.14³ = $651
NPV project B = -21,000 + 15,000/1.14 + 5,000/1.14² + 7,000/1.14³ = $730
if the discount rate is 14%, project B should be accepted (higher NPV)
the crossover rate is the discount rate where both NPVs are equal.
we must find the IRR using an excel spreadsheet and the IRR function:
=IRR (0,-8000,2000,8000) = 13.28%
