Question

I cannot figure this one out!

NPV profile of two mutually exclusive

projects.

Moulton Industries has two potential projects for the coming? year, Project? B-12 and Project? F-4. The two projects are mutually exclusive. The cash flows are listed in the following table. Draw the NPV profile of each? project, and determine their crossover rate. If the appropriate hurdle rate is? 8% for both?projects, which project does Moulton Industries? choose?

??Cash Flow	Project? B-12		Project? F-4
??Year 0	??$4,210,000		??$3,780,000
??Year 1	?$2,050,000		?$0
??Year 2	?$2,050,000		?$1,050,000
??Year 3	2,050,000		?$1,500,000
??Year 4	?$0		?$2,060,000
??Year 5	?$0		?$2,460,000

What is the crossover rate of the two? projects?

Answer 1

Cross over rate and NPV is calculated based on the question given and it has Time 0 cash flows as positive because no negative symbol is dispalyed in the question.

Croos over rate = 4%

Take the difference in cashflow of the 2 projects and find the IRR. This is the crossover rate. It is shown in excel.

According to NPV @ hurdle rate 8% - Project B-12 is superior than the other project. (In excel row 21)

NPV formula in excel for project B-12

=NPV(B21,$D$5:$H$5)+$C$5

NPV formula in excel for project F-4

=NPV(B21,$D$6:$H$6)+$C$6