Question

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.

Answer 1

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.

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