Year 0 1 2 3 A -5100 2700 2500 1600 B -5100 1100 2300 3700 Use...

Year	0	1	2	3
A	-5100	2700	2500	1600
B	-5100	1100	2300	3700

Use the incremental IRR to determine the range of discount rates for which each project is optimal to undertake. Note you should also include the range in which it does not make sense to take either project.

a. What is the incremental IRR?

b. What is the range of discount rates A is the optimal project to take?

c. What is the range of discount rates B is the optimal project to take?

d. What is the range of discount rates neither project is optimal to take?

Expert Solution

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

Cell reference -

Please note: Incremental IRR also known as Cross over rate, is the at which both projects have equal NPV which means at this rate decision is indifference.

Comparatively, Project with large cash inflows in early years is optimal to select only if discount rate is more than incremental IRR and Project with large cash inflows in later years is optimal to select only if discount rate is less than incremental IRR.

jeff jeffy answered 2 years ago

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