Question

You are considering the following two mutually exclusive projects. The crossover rate between these two projects is _percent and Project should be accepted if the required return is greater than the crossover rate. Year Project A -$33,000 21,000 13,000 13,000 Project B -$33,000 13,160 11,000 24,500

Answer 1

Ans : 9.03% ,A

Crossover rate is the rate at which both project will have same NPV, Let us assume rate to be 22.23%

Statement showing NPV of both project

	A			B
Year	Cash flow	PVIF @ 22.23%	Cash flow x PVIF	Cash flow	PVIF @ 22.23%	Cash flow x PVIF
0	-33,000	1.000	-33,000	-33000	1.000	-33000
1	21000	0.818	17,181	13160	0.818	10767
2	13000	0.669	8,701	11000	0.669	7363
3	13000	0.548	7,119	24500	0.548	13416
NPV			0.9479			-1454

Thus , 22.23% is not the cross over rate

Now let us assume rate to be 9.03%

	A			B
Year	Cash flow	PVIF @ 9.03%	Cash flow x PVIF	Cash flow	PVIF @ 9.03%	Cash flow x PVIF
0	-33,000	1.000	-33,000	-33000	1.000	-33000
1	21000	0.917	19,261	13160	0.917	12070
2	13000	0.841	10,936	11000	0.841	9253
3	13000	0.772	10,030	24500	0.772	18903
NPV			7226			7226

Thus cross over rate is 9.03%

Project A should be selected if required rate is more than cross over rate as one can see at rate of 22.23% , project A has still positive NPV while project B has negative NPV, thus any rte above crossover rate , project A would be beneficial