Question

In: Finance

Seether inc has the following two mutually exclusive projects available. What is the crossover rate for...

Seether inc has the following two mutually exclusive projects available.

What is the crossover rate for these two projects? What is the NPV of each project at the crossover rate?

Year Project R Project S

0 -45000 -76000
1 17000 20000
2 19000 20000
3 21000 35000
4 9000 30000
5 7000

10000

Solutions

Expert Solution

Cross Over Rate :

Initial Cash Investment = $ 76000 - $ 45000

= 31000

Year 1 Cash Flow = $20000-17000

= $ 3000

Year 2 Cash Flow = $20000-19000

= $ 1000

Year 3 Cash Flow = $35000-21000

= $ 14000

Year 4 Cash Flow = $ 30000-9000

= $ 21000

Year 5 Cash Flow = $10000-7000

=$ 3000

Based on the above calculations, IRR =

31000 =3000/ (1.0x) +1000/(1.0x)^2 + 14000/ (1.0x)^3+21000/ (1.0x)^4+3000/ (1.0x)^5

Hence, x= 9.239%

crossover rate for these two projects = 9.239%

Net Present Value =  Present Value of Cash Inflows - Present Value of cash Outflows

Project R , NPV =

= [17000*1/(1.09239)^1+19000*1/(1.09239)^2+21000*1/(1.09239)^3+9000*1/(1.09239)^4+7000*1/(1.09239)^5]- 45000

= $13,414.06

Answer : NPV of Project R = $13,414.06

NPV of Project S =

= [20000*1/(1.09239)^1+20000*1/(1.09239)^2+35000*1/(1.09239)^3+30000*1/(1.09239)^4+10000*1/(1.09239)^5]- 76000

= $ 13,413.82

Answer : NPV of Project R = $13,413.82


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