Question

An investor has identified the following two mutually exclusive projects:

  

Year	Cash Flow (A)	Cash Flow (B)
0	–$39,000	–$39,000
1	19,200	5,800
2	14,700	12,300
3	12,200	18,800
4	9,200	22,800

  

Required:

(a)	What is the IRR for Project A?

  

(b)	What is the IRR for Project B?

  

(c)	If the required return is 9 percent, what is the NPV for Project A?

  

(d)	If the required return is 9 percent, what is the NPV for Project B?

  

(e)	At what discount rate would the company be indifferent between these two projects?

Answer 1

a.

IRR of both project is calculated in excel and screen shot provided below:

Internal rate of return of project A is 18.00% and Internal rate of return of project B is 15.77%.

c.

NPV of both project is calculated in excel and screen shot provided below:

Net Present value of project A is $6,925.53 and Net Present value of project B is $7,342.91.

e.

The discount rate at which both project is indifferent is called crossover rate. So crossover rate for both project is calculated in excel and screen shot provided below:

the crossover rate is not possible it must be at infinity.