Question

In: Finance

Using the cash flows given in the table below for mutually exclusive projects Alpha and Beta,...

Using the cash flows given in the table below for mutually exclusive projects Alpha and Beta, assist the Chief Financial Officer in finding the breakeven rate (the crossover point or the rate of indifference). Which project do you recommend if using a cost of capital of 9% and Why?

YEAR

PROJECT ALPHA

PROJECT BETA

0

-175 000

-82 500

1

40 000

30 000

2

60 000

10 500

3

85 000

40 000

4

92 000

75 000

5

92 000

92 000

Select one:

a. Project Alpha as it has greater NPV and IRR than project Beta.

b. The breakeven rate is the same at the cost of the capital so either projects can be chosen.

c. The breakeven point is 11.38% and so Project Alpha should be selected.

d. Project Beta as its cost of capital exceeds the 8.41 % breakeven rate.

Solutions

Expert Solution

Break Even Rate = 11.38% it means select Alpha if cost of capital is less than break even rate and select Beta if cost of capital is more than 11.38%

Option C. The breakeven point is 11.38% and so Project Alpha should be selected.

Please comment if you face any difficulty and please don't forget to provide positive rating


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