Question

1. Consider the following two mutually exclusive projects X and Y:

	X	Y
Year 0	-$5,500	-$4,500
Year 1	$3,000	$2,800
Year 2	$2,000	$2,000
Year 3	$2,000	$1,000
Year 4	$1,000	$1,000

1. 1. What is the crossover rate for these two projects?
2. 2. Sketch the NPV profiles for X and Y (point out the IRR of each project and the crossover rate in the NPV profiles).
   3. The required return is 10%. Which project should be chosen?

Answer 1

The formulas and the inputs used is as follows:

The result is as follows:

a. The crossover rate is 7.13%

b. The IRR of each project and the crossover rate is depicted in the NPV profile.

c. If the required return is 10%, project Y should be selected based on NPV technique. Find the calculation in the above table.