Question

In: Finance

Looking for assistance with the "sketch/graph" part of the below question:Consider the following projects, X and...

Looking for assistance with the "sketch/graph" part of the below question:Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Sketch a net present value profile for each of these projects together in one well labeled graph, indicating the point at which one will be indifferent between projects X & Y.

Solutions

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

In above graph, we can see at discount rate 25% both Projects have same NPV thus, 25% is their Cross over rate. Projects at cross over rate are equally good.

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.


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