Question

a firm must choose between two mutually exclusive projects, a & b. project a has an initial cost of $10000. its projected net cash flows are $800, $2000, $3000, $4000, and $5000 at the end of years 1 through 5, respectively. project b has an initial cost of $14000, and its projected net cash flows are $7000, $5000, $3000, $2000, and $1000 at the end of years 1 through 5, respectively. at what cost of capital would the firm be indifferent to the two projects (i.e. be willing to choose either one)?

3.47%

6.58%

6.82%

7.66%

7.18%

Answer 1

Here actually we need to calculate Cross over rate at which the NPV of both the projects will be same and as a result it will be indifferent.

Correct answer is option b. 6.58%