Question

In: Finance

You are using a net present value profile to compare Project A and B, which are...

You are using a net present value profile to compare Project A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two?

A.The internal rate of return of each project is equal to zero.

B.The net present values for both projects are the same at a certain discount rate

C. The net present value of each project is equal to zero

D. The internal rate of return for Project A equals that of Project B, but generally does not equal zero

Not sure why the Expert asked for Data, it's not a calculation, its asking what is true of the comparison of two projects, there is no data....

Expert Solution

Answer: (B) is true

B.The net present values for both projects are the same at a certain discount rate.

Although we are using NPV to select the project which is mutually exclusive at various discount rates. But NPV will be equal at a certain rate if cash flow is not equally distributed. Example is given below:

Project A (INR in Lakhs)

Year Cash Flow PVF@10% PV of Cash Flow @10% PVF @8% PV Of Cash flow @8%

0 -10 1 -10 1 -10

1 2 .909 1.818 0.92592.. 1.8518...

2 2 .826 1.652 0.8573..... 1.71467...

3 2 .751 1.502 0.793..... 1.587....

NPV -5.028 -4.8465

Project B (INR in Lakhs)

Year Cash Flow PVF@10% PV of Cash Flow PVF @8% PV Cash Flow

0 -7.514 1 -7.154 1 -7.154

1 1 .909 .909 .9259... .9259

2 1 .826 .826 .8573..... .8573

3 1 .751 .751 0.79383 .79383

NPV -5.028 -4.57690

NPV is equal @10% discount rate, but not at any other discount rate. Although at 8% Project B will be selected as higher NPV.

jeff jeffy answered 10 months ago

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