Question

ZZY, LLC, has identified the following two mutually exclusive projects: Year Cash Flow for A in...

ZZY, LLC, has identified the following two mutually exclusive projects:

Year Cash Flow for A in $ Cash Flow for B in $
0 -65,000 -65,000
1 34,000 19,000
2 27,000 25,000
3 21,000 29,000
4 17,000 34,000

Below what discount rate is B the better project than A? (Hint: You need to find the crossover rate). Answer in percent to two decimals.

Homework Answers

Answer #1

Year 0 Incremental cash flow of B wrt A = -65000-(-65000) = 0
Year 1 Incremental cash flow of B wrt A = 19000-(34000) = -15000
Year 2 Incremental cash flow of B wrt A = 25000-(27000) = -2000
Year 3 Incremental cash flow of B wrt A = 29000-(21000) = 8000
Year 4 Incremental cash flow of B wrt A = 34000-(17000) = 17000

Cross over rate is the rate at which incremental cash flows are discounted to 0
CF/(1+r)t = 0
0 + -15000/(1+r) + -2000/(1+r)2 + 8000/(1+r)3 + 17000/(1+r)4 =0
Hence crossover rate r = 16.31%

Below 16.31% Project B is better than Project A

Best of luck. God Bless

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