Question

You are evaluating two projects with the following cash flows:

Year	Project X			Project Y
0	−$553,200			−$521,400
1	217,600			207,300
2	227,500			217,100
3	234,700			225,000
4	194,400			185,800

What is the crossover rate for these two projects?

Multiple Choice

• 22.23%

• 9.88%

• .72%

• 8.98%

• 21.51%

Answer 1

Difference between project cash flows

Project X -Y
Year	Cash flow stream
0	-31800
1	10300
2	10400
3	9700
4	8600

Project X -Y
IRR is the rate at which NPV =0
IRR	8.98%
Year	0	1	2	3	4
Cash flow stream	-31800.000	10300.000	10400.000	9700.000	8600.000
Discounting factor	1.000	1.090	1.188	1.294	1.410
Discounted cash flows project	-31800.000	9451.378	8756.876	7494.549	6097.196
NPV = Sum of discounted cash flows
NPV Project X -Y =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Cross over rate =	8.98%