Question

13. Two mutually exclusive projects are being considered: Project X requires $500 and results in a return amounting to a one-time-only profit of $1,000 five years from now. Project Y also requires $500, but will return $170 per year for each of the next 5 years. Determine at what rate of return the two projects are equivalent and explain the significance of the intersection point of the two PW profiles for the selection of the preferred alternative

Answer 1

Given $ 110 Cashout How of project x $500 cash inflow at the end of year 5 . 1000 cashout flows of project y - $500 cash rofleurs at the end 1 year cash inflows at the end og Year - $110 cast influew at the end of year} - $170 cash inflour at the end 9 year4e $170 cach inflows at the end of year 5= $170. The rate at which 2 mutually exclusive project are equivalent is computed as follows: Project & Project y cf at the end of years $500 (ltr) Oltre CF₂ + it + CF₂ + cff (1+1 (14) 4 (1tr5 CF's (trys + $170 (1+r33 (11) 4 (1+r) (ltr)s + $1000 (141,5 - $ 500 $1000 $ 500 $110 $110 $170 (17) $110 $ 500 $170 - $500 + $ 500 (1+r) $170 $170 $170 $170 (i+1) (1+r) ² (itt (Arju $1000 - $10 $110 $170 + $170 (1+) $170 $ 170 (i+r35 (1+r)' Citry? By solving the above equation by trial and error method, rgfree w a figure of 4.2).. This is + (1+1) + $170 (1+) - (LH)3 (trys $&30 $110 + +#170 (1+r) 4 (larg cross over rate. Project x and Project y being mutually exclusive projects intersect each other or nill be equal at a rate of 8-2%. t.e crossover rate is 8,2%. 1/1 =