Question

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.

Year	Project(A)	Project (B)
0	-$30,000	-$30,000
1	13,000	5,000
2	11,000	5,000
3	9,000	5,000
4	7,000	5,000
5	0	5,000
6 7 8 9 10	0 0 0 0 0	5,000 5,000 5,000 5,000 5,000

The required rate of return is 10%

Q1:(4 points) Define and find the crossover rate.

Q2:Sketch the NPV profile. Plot all the relevant coordinates (i.e., the points on the x and y axis; and the cross-over rate) on the graph.

Answer 1

Crossover rate is the rate at which NPV of the both the projects will be equal and it is calculated by calculating the difference between cash flows of both the projects and calculating the IRR. That IRR will be the crossover rate.

NPV of each of the project is calculated by using formula = Initial cash outflow +NPV( rate, all other cashflow)

NPV profile is shown by taking different discount rates