Question

You are considering the following two mutually exclusive projects. The crossover rate between these two projects is ___ percent and Project ___ should be accepted if the required return is greater than the crossover rate.

Year	Project A			Project B
0		−$27,000			−$27,000
1		10,000			18,100
2		10,000			8,000
3		18,000			10,120

Multiple Choice

a.) 18.64%; A

b.) 11.75%; B

c.) 11.75%; A

d.) 17.19%; B

e.) 17.19%; A

Answer 1

Crossover rate is the internal rate of return in difference in cash flows of projects.

first calculate difference in cash flow then find IRR of that difference.

so crossover rate is 11.75%

Project B has higher cashflow early and it will have the greater NPV at higher interest rates.

The option b) is correct that is 11.75%;B