Question

(Numbers in parentheses are negative) These two projects are independent. Year Cash Flow of A Cash Flow of B 0 ($5000) ($2000) 1 $1000 $1000 $2000 $ 1000 3 $2000 $2000 4 $2000 $1000 5 $1000 ($1000) N What is the approximate crossover point between the two projects if the required rate of return is 9.5%? 6.12% 7.57% 12.39% 7.24% There is no crossover point in this case.

Answer 1

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Answer: 7.57%

Year 5 Cross over rate (IRR) is computed on the difference between the yearly cashflows YEAR Year 0 Year 1 Year 2 Year 3 Project A -5,000 1,000 2,000 2,000 Project B -2,000 1,000 1,000 2,000 Variance -3,000 1,000 Year 4 2,000 1,000 1,000 1,000 -1,000 2,000 IRR 17.74% 40.97% 7.57% Cross over Rate 7.57%