Consider two mutually exclusive projects. The crossover rate for the two project
ID: 2714760 • Letter: C
Question
Consider two mutually exclusive projects. The crossover rate for the two projects is 12%, at which point both have an NPV of $5,000. At a discount rate of 10%, Project 1 has a higher NPV than Project 2.
a. If the appropriate discount rate is actually 15% (not 10%), which project is better? Explain your answer.
b. Draw a rough sketch of NPVs and the crossover point to illustrate your answer. Use the following additional information as needed: Project 1’s IRR is 15%. Project 2’s IRR is 22%. Label the information provided on your graph. PLEASE DRAW!
Explanation / Answer
a)
decreasing the discount rate increases NPV of project 1 more than project 2
so increasing the discount rate decreases NPV of of project more than project 2
hence project 2 is higher than project 1
b)