Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash

Question

Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash Flow (Y) 0 $16,600 $16,600 1 6,640 7,150 2 7,220 7,800 3 4,740 3,490 Requirement 1: (a) What is the IRR of Project X? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) IRR % (b) What is the IRR of Project Y? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) IRR % Requirement 2: What is the crossover rate for these two projects? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Crossover rate %

Explanation / Answer

IRR is the minimum acceptable rate of return at which NPV is equal to 0. IRR can be calculated with the use of IRR function of EXCEL. The basic formula for calculating IRR is given below:

NPV = 0 = Cash Flow Year 0 + Cash Flow Year 1/(1+IRR)^1 + Cash Flow Year 2/(1+IRR)^2 + Cash Flow Year 3/(1+IRR)^3

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Part A)

IRR of Project X has been calculated with the use of EXCEL as follows:

IRR = 6.24%

___________

Part B)

IRR of Project Y has been calculated with the use of EXCEL as follows:

IRR = 6.06%

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Part C)

To calculate the crossover rate, we need to determine the difference in cash flows of the 2 projects and calculate IRR for these cash flows.

Crossover Rate = 9.70%

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