Question

Consider the following two projects:

Project	Year 0 CF	Year 1 CF	Year 2 CF	Year 3 CF	Year 4 CF	Cost of capital
A	-100	40	50	60	10	15%
B	-73	30	30	30	30	15%

The IRR of project A =? maybe round this one to the closest?

A) 7.7%

B) 21.6%

C) 23.3%

D) 42.9%

The IRR of project B =?

A) 21.6%

B) 23.3%

C) 42.9%

D) 7.7%

Which of the following statements is correct?

A) Accept project A since its IRR > 15%.

B) Reject project B since its NPV > 0.

C) Accept project A since its NPV < 0.

D) Accept project B since its IRR < 15%.

The maximum number of IRRs that can be found for project B is:

A) 3

B) 1

C) 2

D) 0

The crossover rate is:

A) 27.65%

B) 15.31%

C) 20.58%

D) 33.26%

Answer 1

Using Excel formula to calculate IRR and Crossover rate

		A	B	C
	Year	Project A	Project B	Cash Flow difference
1	0	-100	-73	-27
2	1	40	30	10
3	2	50	30	20
4	3	60	30	30
5	4	10	30	-20
	IRR	24.28%	23.34%	27.65%	Crossover Rate
	Using excel formula	IRR(A1:A5)	IRR(B1:B5)	IRR(C1:C5)

1. First IRR of A is 24.28%
2. IRR of B is 23.34%
3.Option A accept Project Because IRR is greater than 15%
4. Number of IRRs of B is 1
5. Option a crossover rate is 27.65%

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