Question

The manager of FIRN is evaluating two mutually exclusive projects. The costs and expected cash flows are given in the following table. The appropriate discount rate is 11.5% per annum.

Years	Project X	Project Y
0	-$300,000	-$350,000
1	$150,000	$150,000
2	$150,000	$150,000
3	$250,000	$200,000
4	$80,000	$200,000
5	$80,000	$200,000
IRR	42.2%	39.3%

Calculate the crossover rate/incremental IRR, at which the NPV profiles for Projects A and B intersect.

2.Which project should be accepted based on your answer? Please Explain your answer.       

Answer 1

Cross over Rate is the rate at which NPV of projects is equal and IRR is the rate at which NPV of projects is zero

Project with IRR above the cross over rate but closer to the cross over rate will have higher NPV.

Hence Project Y should be selected as it is closer to cross over rate.