Question

You are considering the following two mutually exclusive projects. The crossover point is _____ and Project _____ should be accepted if the discount rate is 14%.
a. 12.79%; B
b. 15.96%; A
c. 15.96%; B
d. 13.28%; B
e. 13.28%; A
Project A
Year 0 -$21,000
Year 1 $7,000
Year 2 $7,000
Year 3 $15,000
Project B
Year 0 -$21,000
Year 1 $15,000
Year 2 $5,000
Year 3 $7,000

Answer 1

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%