Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash Flow (Y) 0...
Question:
Consider the following two mutually exclusive projects:
| Year | Cash Flow (X) | Cash Flow (Y) |
|---|---|---|
| 0 | -$20,200 | -$20,200 |
| 1 | $8,900 | $10,200 |
| 2 | $9,200 | $7,850 |
| 3 | $8,850 | $8,750 |
A. Calculate the IRR for each project.
B. What is the crossover rate for these two projects?
C. What is the NPV of Projects X and Y at discount rates of 0%, 15%, and 25%?
Incremental Analysis:
In the capital budgeting process, both the internal rate of return (IRR) and the net present value (NPV) methods can be utilized to make an investment decision. The IRR enables us to figure out the discount rate at which the present value of future cash flows is equal to the initial cost. NPV on the other hand enables us to determine the current worth of a project after netting off the present value of future cash flows against the initial cost. Sometimes projects can have the same NPV amount and the discount rate at which this happens is referred to as the cross-over rate.
Answer and Explanation: 1
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