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In: Finance

You are considering the following two mutually exclusive projects. YEAR             PROJECT (A)         PROJECT (B)        0&

You are considering the following two mutually exclusive projects.

YEAR             PROJECT (A)         PROJECT (B)   

    0                  -$35,000                  -$35,000

    1                     22,000                     13,000

    2                     20,000                     21,000

    3                     13,000                     22,000

What is the crossover point?

Solutions

Expert Solution

Calculation of Crossover rate
Year Cashflows Discounting factor for 5.71% Present [email protected]% Cashflows Discounting factor for 5.71% Present [email protected]%
Project A Project B
0 -35000 1 -35000 -35000 1 -35000
1 22000 0.945984297 20811.65453 13000 0.945984297 12297.79586
2 20000 0.89488629 17897.72579 21000 0.89488629 18792.61208
3 13000 0.846548377 11005.1289 22000 0.846548377 18624.0643
NPV                       14,714.51                       14,714.51
Crossover rate is the rate at which both the projects have same NPV.
Using trial and error method we guessed the discounting rate to be 5.71% .

jeff jeffy answered 1 year ago
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