Question
In: Finance
8. The (net) cash flows of project C and D are shown below: Net Cash Flow...
8. The (net) cash flows of project C and D are shown below: Net Cash Flow ($) Year Project C Project D 0 -2,000 -1,000 1 3,000 650 2 125 1,500 a. Find the crossover rates. (1.5 point) b. The cost of capital is 12 percent. If C and D are mutually exclusive, which project should be accepted? Why? (0.5 point)
Solutions
Expert Solution
| Answer a | ||||||
| Calculation of crossover rate | ||||||
| The crossover rate is the point at which the two projects achieve the same net present value. | ||||||
| Year | Project C Cash flow | Project D Cash flow | Diiference | |||
| a | b | c | b-c | |||
| 0 | -$2,000.00 | -$1,000.00 | -$1,000.00 | |||
| 1 | $3,000.00 | $650.00 | $2,350.00 | |||
| 2 | $125.00 | $1,500.00 | -$1,375.00 | |||
| Aply IRR formula to the difference to get crossover rate. | ||||||
| Crossover rate = | 10.00% | |||||
| Answer b | ||||||
| Calculation of NPV of projects | ||||||
| Year | Discount factor @ 12% | Project C | Project D | |||
| Cash flow | Present Value | Cash flow | Present Value | |||
| 0 | 1 | -$2,000.00 | -$2,000.00 | -$1,000.00 | -$1,000.00 | |
| 1 | 0.892857143 | $3,000.00 | $2,678.57 | $650.00 | $580.36 | |
| 2 | 0.797193878 | $125.00 | $99.65 | $1,500.00 | $1,195.79 | |
| NPV of projects | $778.22 | $776.15 | ||||
| NPV of project C is higher , hence Project C should be accepted. | ||||||
jeff jeffy answered 2 years agoRelated Solutions
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