Question

Carolina Company is considering Projects and Lwhose flows are shown below. These projects are mutually exclusive, equally risky, and are not repeatable. What is the cross-over rate ?k=7.75%

Year. CFs. CFL

0. -$1,050. -$1,050

1. $675. $360

2. $650. $360

3. $360

4. $360

Answer 1

There seems to be some problem with the numbers as we cant get crossover rate with that, I have corrected and solved it.

Project	0	1	2	3	4
S	-$1050	$360	$360	$360	$360
L	-$1050	$675	$650
Difference	0	-$315	-$290	$360	$360

Now, we will calculate the IRR of the difference and that rate will be our crossover rate.

IRR is the rate for which NPV equals zero.

0 = -315/(1+IRR)^1 -290/(1+IRR)^2 +360/(1+IRR)^3 +360/(1+IRR)^4 -0

We will use heat and trial method to get that value of IRR for which NPV equals zero.

IRR = 8.994%

The crossover rate is 8.994% Answer

Kindly do let me know in case you have any queries.