Consider the following two mutually exclusive projects Cash Flow (Y) 20,000 10,1
ID: 2784268 • Letter: C
Question
Consider the following two mutually exclusive projects Cash Flow (Y) 20,000 10,100 7,800 8,700 Year Cash Flow (X) -20,000 8,850 9,100 8,800 2 3 Calculate the IRR for each project. (Round your answers to 2 decimal places. (e.g., 32.16) IRR Project X Project Y What is the crossover rate for these two projects? (Round your answer to 2 decimal places. (e.g., 32.16)). Crossover rate What is the NPV of Projects X and Y at discount rates of 0%, 15%, and 25%? (Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16)) Project X Project Y Discount rate 0% 15% 25%Explanation / Answer
NPV = -CF0 + CF1/(1 + r) + CF2/(1 + r)^2 + CF3/(1 + r)^3
When N = 0, r = IRR
At crossover rate, NPV(X) = NPV(Y) or, NPV(X – Y) = 0 or, crossover rate is the IRR of CF(X – Y)
Year CF (X) CF (Y) CF (X - Y) 0 -20,000 -20,000 0 1 8,850 10,000 -1,150 2 9,100 7,800 1,300 3 8,800 8,700 100 IRR 16.09% 15.97% 20.27% NPV @ 0% 6,750 6,500 NPV @ 15% 363 314 NPV @ 25% -2,590 -2,554