Question

Please solve, show work, and give detail explanation

2. You are considering the following two mutually exclusive projects. Find the crossover rate and determine which project should be accepted if the discount rate is 12 percent. Year Project A -$7,000 $2,500 $3,800 $2,600 Project B -$7,000 $1,400 $3,400 $4,400

Answer 1

NPV is given by:

Σ Rt/(1 i)ttvaries from 1 to n NPV where Rt Cash flow netted (Inflow - Outflow) during the period "t" i Discount rate t number of periods

IRR is the discount rate at which NPV - 0

For Cross Over Rate

Step 1: Subtract Cashflow of Project A and Project B

Step 2: Find IRR of these subtracted cashflows

A В Discount Rate 12% Year Project A -$7,000 2 3 0 $2,500 $3,800 $2,600 4 1 5 2 6 3 IRR =IRR(C3:C6 7

А В E 12% Project A Discount Rate 1 Year Project B 2 -$7,000 $2,500 $3,800 $2,600 -$7,000 $1,400 $3,400 $4,400 3 0 4 1 5 2 6 3 IRR 12.92% 12.65% 7 $112.11 NPV(D1, D4:D6 )+ D3 NPV LC

C E Discount Rate Year 1 12% Project A -$7,000 $2,500 Project B -$7,000 $1,400 $3,400 Project A - Project B 2 3 0 1 C4- D4 $3,800 400 5 2

XV fxIRR(F3:F6) SUMIF A B C F G Discount Rate 12% Project B -$7,000 $1,400 $3,400 $4,400 Project A Project A - Project B 2 Year -$7,000 3 0 0 $2,500 $3,800 $2,600 4 1100 5 2 400 3 -1800 IRR(F3 : F6) IRR 12.92% 12.65% 7 Cross Over Rate <- - NPV $112.11 $2,200.00 10 11 12 H LLU LO LO

fx =IRR(F3:F6) F7 A В C E F G 12% Discount Rate Project B -$7,000 $1,400 $3,400 Project A -$7,000 $2,500 Project A - Project B 2 Year 3 0 0 4 1100 $3,800 $2,600 400 5 2 $4,400 -1800 6 3 IRR 11.02%---- 12.92% 12.65% 7 Cross Over Rate $112.11 $2,200.00 NPV 10 11 12 13 14 H LC

Hence, Cross Over rate = 11.06%

Based on NPV method we should choose project B as its NPV is higher

Based on IRR method we should choose project A as its IRR is higher