Question

You are considering the following two mutually exclusive projects. The crossover rate between these two projects is ___ percent and Project ___ should be accepted if the required return is greater than the crossover rate.

Year	Project A			Project B
0		−$26,000			−$26,000
1		9,500			17,590
2		9,500			7,500
3		17,500			9,610

rev: 05_02_2019_QC_CS-167236, 05_09_2019_QC_CS-168369, 09_24_2019_QC_CS-182411

Multiple Choice

• 18.39%; A

• 11.89%; B

• 16.97%; B

• 11.89%; A

• 16.97%; A

Answer 1

Cross over rate is the rate at which NPV is equal for both projects.

Cross over rate	11.89%	Project A	Project B
Year	Discount factor	Cash flow	Present value @ 0.1189	Cash flow	Present value @ 0.1189
0	1	$      (26,000)	$   (26,000.00)	$      (26,000)	$    (26,000.00)
1	0.893735	$          9,500	$       8,490.48	$        17,590	$     15,720.80
2	0.798762	$          9,500	$       7,588.24	$          7,500	$       5,990.72
3	0.713882	$        17,500	$     12,492.93	$          9,610	$       6,860.40
	NPV		$       2,571.65		$       2,571.92

Answer is 11.89%

Project B is accepted after this rate. B has higher IRR.

Please rate.