Question

1. Here are two projects:

	A	B
0	-100	-100
1	50	20
2	40	40
3	40	50
4	30	60

Find the crossover rate, payback period, discounted payback period, NPV, IRR, profitability index and decide whether you should accept the project. (market rate= 12%, cutoff period= 2 years)

Answer 1

	A	B	A - B
0	-100	-100	0
1	50	20	30
2	40	40	0
3	40	50	-10
4	30	60	-30
IRR	24.00%	21.03%	11.07%
NPV	$ 24.07	$   23.46
PI	1.24	1.23
PBP	2.25	2.8

Crossover rate is the rate at which both projects have equal NPV and can be calculated as IRR of difference in cash flows for both projects.

NPV and IRR can be calculated using the same function in excel or calculator.

Profitability Index (PI) = 1 + NPV / Investment

Payback Period is the no. of years it takes to recover the investment.

As the cutoff period is 2 years and both projects take more than 2 years to recover the investment, none of the projects should be selected.