Question

You are considering two mutually exclusive projects with the following cash flows. Which project would you choose? (The following is the only information you have. Don’t ask for more because I don’t have any more information?) Hint: Find the “crossover rate” to answer. PLEASE SHOW & EXPLAIN ALL WORK

Year	Project A	Project B
0	-240,000	-198,000
1	0	110,800
2	0	82,500
3	325,000	45,000

Answer 1

Use IRR formula in excel to find the internal rate of return.

Year	Project A	Project B	Cashflow A-B
0	-240,000	-198,000	-42,000
1	0	110,800	-110,800
2	0	82,500	-82,500
3	325,000	45,000	280,000
IRR	10.63%	11.57%	9.85% (crossover rate)

• if discount rate is not given, choose Project B as it has higher IRR rate
• if discount rate is given and it is less than cross over rate, choose project A as it will give higher value of npv
• if discount rate given is higher than crossover rate, choose project B as it gives higher npv