Question

Crossover and NPV. Seether, Inc., has the following two mutually exclusive projects available. Year Project R Projects -$45,000 17,000 19,000 21,000 9,000 7,000 -$76,000 20,000 20,000 35,000 30,000 10,000

Answer 1

Crossover rate is the Internal Rate of Return (IRR) arrived at the net cash flows of the 2 projects available. Therefore, first arrive at the difference between cash flows of 2 projects. Then, arrive at the IRR with the help of formula used. Using the same crossover rate, NPV for both the projects is arrived separately.

А В C D Project R 0 $(45,000.00) $(76,000.00) $ 1 $ 17,000.00 $ 20,000.00 $ 2 $ 19,000.00 $ 20,000.00 $ 3 21,000.00 $35,000.00 $ 4 9,000.00 $30,000.00 $ 5 $ 7,000.00 $ 10,000.00 $ Project S-Project R (31,000.00) Project S 1 Year 2 3,000.00 1,000.00 14,000.00 21,000.00 6 7 3,000.00 9.24% 8 CROSSOVER RATE 9 $31,932.30 $44,689.09 10 NPV LO

Formula used in the above table are as follows -

А В C 1 Year Project R -45000 17000 19000 Project S- Project R -+C2-B2 Project S - 76000 20000 20000 35000 2 0 3 1 4 2 5 3 6 4 7 5 +C3-B3 +C4-B4 21000 +C5-B5 30000 10000 9000 +C6-B6 7000 +C7-B7 =IRR(D2:D7,0) 8 CROSSOVER RATE 9 10 NPV NPV($D$8,(B3:B7),B2) =NPV($D$8,(C3:C7),C2)

I hope above answer will help in your task. Thank you.