15.) ZZZ Best (ZZZ) is considering two mutually exclusive projects wi flows show

Question

15.) ZZZ Best (ZZZ) is considering two mutually exclusive projects wi flows shown below. two mutually exclusive projects with the annual cash | Project A -300000 200000 100000 75000 | Project B -500000 100000 250000 300000 CF O CF I CF 2 CF 3 | IRR of Project NPV @ 8% Discount Rate NPV @ 11% Discount Rate Cross Over Point NPV at Point of Indifference What is the IRR of each project? IRR A IRR B If ZZZ's required rate of return for these projects is 8% which project should it choose based on NPV? Which project should it choose if the required rate of return is 11% based on NPV? At what required rate of return should it be indifferent to the choice of projects, based solely on their NPV (crossover point)? What is the NPV of each project at the point of indifference? What is the highest discount rate at which at least one of the two projects should not be rejected ? 5 of 8

Explanation / Answer

IRR and NPV can be calculated using their respective functions on a calculator or excel

Crossover rate is the IRR of the difference in cash flows of both projects.

Select the project with higher NPV.

At 8%, select B

At 11%, select A

Crossover rate = 10.35%

As IRR of B is 12.21%, this is the rate above which Project B could be rejected but Project A could not be rejected.

A B B-A -300000 -500000 -200000 200000 100000 -100000 100000 250000 150000 75000 300000 225000 IRR 14.72% 12.21% 10.35% NPV (8%) $30,456.49 $45,076.97 NPV (11%) $16,181.78 $12,353.11 NPV (10.35%) $19,174.14 $19,174.14

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