In: Finance
Seether, Inc., has the following two mutually exclusive projects available.
Year | Project R | Project S | ||||||||||||||||
0 | –$ | 55,000 | –$ | 76,000 | ||||||||||||||
1 | 21,000 | 20,000 | ||||||||||||||||
2 | 22,000 | 20,000 | ||||||||||||||||
3 | 19,000 | 35,000 | ||||||||||||||||
4 | 12,000 | 30,000 | ||||||||||||||||
5 | 9,000 | 10,000 | ||||||||||||||||
|
Answer
Requirement -1 : Crossover Rate of two projects is the rate of return where the NPV of two projects becomes equal.
NPVR = NPVS
-55000 + 21000/ (1+r) +22000/ (1+r)2 + 19000/ (1+r)3 + 12000/ (1+r)4 + 9000/ (1+r)5 = -76000 + 20000/ (1+r) +20000/ (1+r)2 + 35000/ (1+r)3 + 30000/ (1+r)4 + 10000/ (1+r)5
21000 + 1000/ (1+r) +2000/ (1+r)2 - 16000/ (1+r)3 - 18000/ (1+r)4 - 1000/ (1+r)5 = 0
r= Cross over Rate = 11.87 %
IRRR = 18.26 %
IRRS = 15.92 %
Requirement -2 :
PV at interest rate of 11.87%
NPVR = NPVS ( At Cross Over Rate) = $ 7720