Answer:
Year Cash Flow (A) Cash Flow (B)
0 -58,000 -58,000
1 34,000 21,200
2 28,000 25,200
3 20,000 30,000
4 13,600 25,200
Requirement 1:
a) What is the IRR for each of these projects?
using an excel spreadsheet and the IRR function:
Project A's IRR = 28.3%
Project B's IRR = 25.7%
(b) If you apply the IRR decision rule, which project should the company accept?
Project A (its IRR is higher)
Requirement 2:
(a) Assume the required return is 14 percent. What is the NPV for each of these projects?
using an excel spreadsheet and the NPV function:
Project A's NPV = $14,921.37
Project B's NPV = $15,156.64
(b) Which project will you choose if you apply the NPV decision rule?
Project B (its NPV is higher)
Requirement 3:
(a) Over what range of discount rates would you choose Project A?
higher than 14.85%
(b) Over what range of discount rates would you choose Project B?
lower than 14.85%
(c) At what discount rate would you be indifferent between these two projects?
crossover rate calculation
Year Cash Flow (A) Cash Flow (B) differential amount
0 -58,000 -58,000 $0
1 34,000 21,200 $12,800
2 28,000 25,200 $2,800
3 20,000 30,000 -$10,000
4 13,600 25,200 -$11,600
using an excel spreadsheet and IRR function, the cross over rate = 14.85%
