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Consider the following two mutually exclusive projects:

Year Cash Flow (X) Cash Flow (Y)
0 −$ 15,600 −$ 15,600
1 6,740 7,350
2 7,320 7,700
3 4,840 3,690


1.What is the IRR of Project X?

2.What is the IRR of Project Y?

3.What is the crossover rate for these two projects?

Respuesta :

Karabo99

Answer:

1) The IRR of Project X is 10.81%

2) The IRR of Project Y is 10.87%  

3) Cross over rate = 9.65%

Explanation:

1) 0 = -$ 15,600 +  6,740/[1+IRR] + 7,320/[1+IRR]^2 + 4,840/[1+IRR]^3

IRR = 10.81%

Therefore, The IRR of Project X is 10.81%

2) 0 = -$ 15,600 +  7,350/[1+IRR] + 7,700/[1+IRR]^2 + 3,690/[1+IRR]^3

IRR Y = 10.87%

Therefore, The IRR of Project Y is 10.87%  

3) Cross over rate = 9.65% i.e the rate at which NPVs are equal

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