Seether, Inc., has the following two mutually exclusive projects available. Year
ID: 2756284 • Letter: S
Question
Seether, Inc., has the following two mutually exclusive projects available.
Year Project R Project S
0 –$ 78,000 –$ 98,400
1 27,200 24,600
2 26,200 24,600
3 24,200 39,600
4 18,200 34,600
5 11,400 13,600
Requirement 1: 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).)
Internal rate of return
Requirement 2: What is the NPV of each project at the crossover rate? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Project R Year 0 1 2 3 4 5 CF -78000 27000 26200 24200 18200 11400 IRR 13% Project S Year 0 1 2 3 4 5 CF -98400 24600 24600 39600 34600 13600 IRR 12% Crossover rates We substract CF of Project R FROM Project S Year 0 1 2 3 4 5 CF -20400 -2400 -1600 15400 16400 2200 IRR 10% This is the crossover rate. S project is preferable when the cost of capital is below 10%. However, if the cost of capital exceeds 10%, the R project will have higher net present value. NPV AT CROSSOVER RATE Project R Year 0 1 2 3 4 5 CF -78000 27000 26200 24200 18200 11400 DCF -78000.00 24474.85 21528.49 18025.36 12288.42 6977.274 NPV 5294.40 Project S Year 0 1 2 3 4 5 CF -98400 24600 24600 39600 34600 13600 DCF -98400.00 22299.3 20213.78 29496.04 23361.51 8323.766 NPV 5294.40