Consider two mutually exclusive projects. The crossover rate for the two project
ID: 2715057 • 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.
Explanation / Answer
A. Cross over rate is 12% and at a discount rate of 10%, Project 1 has a higher NPV than Project 2.
This means for discount rate above 12%, Project 2 has a higher NPV than Project 1. So, if the discount rate is 15% then Project 2 has a higher NPV. So this should be selected.