Question

You are considering the following two mutually exclusive projects. The crossover point is _____ percent.

YEAR PROJECT A PROJECT B

0 -$16,000 -$16,000

1 11,000 5,000

2 8,000 7,000

3 3,000 12,000

PLEASE SHOW WORK WITHOUT USING EXCEL PLEASE THE ANSWER IS 14.42

Answer 1

Solution:-

First we need to Calculate Incremental Cash Flows-

Incremental Cash flows
Year	Project A Cash flows	Project A Cash flows	Incremental Cash Flows
0	-16000	-16000	0
1	11000	5000	6000
2	8000	7000	1000
3	3000	12000	-9000

To Calculate Cross-Over Point (IRR)-

IRR is the rate where NPV is zero.

NPV = Present Value of Cash Inflow - Present Value of Cash outflow.

Let R = 10%

NPV =

NPV = $6,000 * 0.9091 + $1,000 * 0.826 - $9,000 * 0.751

NPV = -$480.84

Let R = 15%

NPV =

NPV = $6,000 * 0.8695 + $1,000 * 0.756 - $9,000 * 0.658

NPV = $55.89

Formula of Internal Rate of Return -

IRR =

IRR =

IRR = 14.42%

Cross-Over Point is 14.42%

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