Boston Chicken is considering two mutually exclusive projects with the following

Question

Boston Chicken is considering two mutually exclusive projects with the following cash flows. What is the crossover rate? If the required rate of return is lower than the crossover rate, which project should be accpeted?

Year                      Project A                               Project B

0                            -50,000                                  -50,000

1                              31,000                                  42,000

2                              26,000                                   21,000

3                              27,000                                   18,000

Explanation / Answer

NPV= 0 -11000/(1+r)^1 + 5000/(1+r)^2 + 9000/(1+r)^

So, R= 15.99%

NPV of project A=-50000+31000/(1.1599)+26000/(1.1599)^2+27000/(1.1599)^3=

IRR of A = 32.22

NPV of project B=-50000+42000/(1.1599)+21000/(1.1599)^2+18000/(1.1599)^3=13353.9512

IRR of B = 34.91 or 35

As IRR of project B is higher so project B should be accepted..

Year Projct A Projct B Diff. 0 -50000 -50000 0 1 31000 42000 -11000 2 26000 21000 5000 3 27000 18000 9000

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