Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash
ID: 2758960 • Letter: C
Question
Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash Flow(Y)
year//cash flow (x)// cash flow (y)
0 $16,700 $16,700
1 6,630 7,130
2 7,210 7,810
3 4,730 3,470
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
Project X Calculation of the IRR Let the discount rate be 10% NPV = Cash Inflows- Cash Outflows NPV = 6630/(1.1)+7210/(1.1)2+4730/(1.1)3-16700 6630*.909+7210*.826+4730*.751-16700 5765+5452+3110-16700 NPV = -2373 Let the rate be 5% NPV = 6630/(1.05)+7210/(1.05)2+4730/(1.05)3-16700 6630*.952+7210*.907+4730*.864-16700 6314+6540+4086 $240 IRR = Lower Rate+ NPV at lower rate/ NPV at lower rate- NPV at higher rate ( HR-LR) 5+240/240+2373(10-5) 5+.46 5.46% The IRR OF PROJECT x is 5.46% Project Y Calculation of the IRR Let the discount rate be 10% NPV = Cash Inflows- Cash Outflows NPV = 7130/(1.1)+7810/(1.1)2+3470/(1.1)3-16700 7130*.909+7810*.826+3470*.751-16700 6200+5905+2282-16700 NPV = -2313 Let the rate be 5% NPV = 6630/(1.05)+7210/(1.05)2+4730/(1.05)3-16700 7130*.952+7810*.907+3470*.864-16700 6790+7084+2998 $172 IRR = Lower Rate+ NPV at lower rate/ NPV at lower rate- NPV at higher rate ( HR-LR) 5+172/172+2313(10-5) 5+..35 5.35% The IRR OF PROJECT x is 5.35%