Question

Project A and Project B are mutually exclusive. Project A has an IRR of 10 percent. Project B has an IRR of 12 percent. The crossover rate is 7%. Both projects have standard cashflow, (i.e. investment at time zero followed by a series of cash inflows). If the firm’s marginal cost of capital is 6 percent, then:

		Project B should be accepted and Project A rejected.
		Both projects should be accepted.
		Both projects should be rejected.
		Project A should be accepted and Project B rejected.

How many monthly payments remain to be paid on an 8% compounded monthly mortgage with a 30-year amortization and monthly payments of $733.76, when the balance reaches one-half of the $100,000 mortgage?

		approximately 180 payments
		approximately 268 payments
		approximately 91 payments
		approximately 68 payments

Answer 1

Answer : Correct option is Project A should be accepted and Project B rejected.

Reason :

Crossover rate is the rate at which Net present value of Both the projectes are equal. Crossover rate is used by organisations to know which projects is more favorable. In this case Project A is more favourable than Priject B because when the crossover rate is more then cost of capital then we select Project with lower IRR. Therefore Project A should be accepted and Project B rejected.

Answer : Correct Option is approximately 91 payments

Calculations

Using Nper function of Excel

=NPER(rate,pmt,pv,fv)

where rate is the rate of interest per period i.e 8% / 12 = 0.66666667%

pmt is the monthly mortgage payment i.e 733.76

pv is the present value i.e 100000 / 2 = 50000

fv is 0 as we wants to know when it will be repaid .

=NPER(0.66666667%,733.76,50000,0)

The number of payments remaining is 91 payments approximately.