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27 November, 16:49

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?

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Answers (1)
  1. 27 November, 17:14
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    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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