Question

Consider that Luxio has identified the following two mutually exclusive projects:

Cash Flow (A)

Year 0.........-34000

Year 1..........16500

Year 2.........14000

Year 3.........10000

Year 4..........6000

Cash Flow (B)

Year 0........-$34,000

Year 1...........5,000

Year 2.........10,000

Year 3........18,000

Year 4........19,000

The required return is 11%.

Question: Over what range of discount rates would the company choose project A? Explain.

P.S. I have calculated the IRR and NPV for 11% required return.

Project A: IRR= 16.60% NPV= $   3,491.88

Project B: IRR= 15.72% NPV= $   4,298.06

I have also calculated the crossover rate at which the company will be indifferent between the two projects: 13.75%.

I'm having a hard time explaining why the company will choose project A if the discount rate is above 13.75?

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

remember the rule :
IF COST OF CAPITAL IS GREATER THAN CROSSOVER RATE, BOTH NPV AND IRR LEAD TO SAME PROJECT SELECTION