Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash
ID: 2767794 • Letter: C
Question
Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash Flow (Y) 0 –$ 19,400 –$ 19,400 1 8,700 9,800 2 8,800 7,650 3 8,650 8,550 Calculate the IRR for each project. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) IRR Project X 16.57 % Project Y 16.68 % What is the crossover rate for these two projects? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Crossover rate %
Explanation / Answer
Calculation of the IRR of the project NPV at 11% NPV = Present value of cash inflows- outflows From the annuity table NPV = 8700*.900+8800*.811+8650*.731-19400 7838+7142+6325-19400 NPV = $1,905 NPV at 20% NPV = 8700*.733+8800*.694+8650*.579-19400 7250+6111+5006-19400 ($1,033) IRR = Lower Rate+ NPV at Lower rate/ NPV at Lower Rate- NPV at Higher Rate ( HR-LR) 11+1905/1905+1033(20-11) 11+5.83 IRR = 16.83% Project B NPV at 11% NPV = 9800*.900+7650*.811+8550*.731-19400 8829+6209+6252 NPV = $1,890 NPV at 20% NPV = 9800*.733+7650*.694+8550*.579-19400 8167+5312+4948 ($973) IRR = 11+1890/1890+973*(20-11) 11+7.26 18.26% Project A should be selected