Additional crossover rate problems

1.

Two projects being considered

following projected cash flows:
Year
0
1
2
3
4
5

are

Project A
Cash Flow
-$50,000
15,990
15,990
15,990
15,990
15,990

mutually

exclusive

and

have

the

Project B
Cash Flow
-$ 50,000
0
0
0
0
100,560

At what rate (approximately) do the NPV profiles of Projects A and B

cross?
a.
b.
c.
d.
e.

6.5%
11.5%
16.5%
20.0%
The NPV profiles of these two projects do not cross.

Solve for crossover rate using the differential project CFs, CFA-B
Inputs: CF0 = 0; CF1-4 = 15,990; CF5 = -84,570.
Output: IRR = 11.49%. The crossover rate is 11.49%.
2.

Hudson Hotels is considering two mutually exclusive projects, Project A

and Project B. The cash flows from the projects are summarized below:
Year
0
1
2
3
4

Project A
Cash Flow
-$100,000
25,000
25,000
50,000
50,000

Project B
Cash Flow
-$200,000
50,000
50,000
80,000
100,000

The two projects have the same risk. At what cost of capital would the
two projects have the same net present value (NPV)?
a.
2.86%
b. 13.04%
c. 15.90%
d. 10.03%
e. -24.45%
Find the crossover rate, which is the IRR of the difference in each
years cash flow from the two projects.
The differences of the cash
flows (CFB - CFA) are entered into the calculator:
CF0 = -100,000; CF1 = 25,000; CF2 = 25,000; CF3 = 30,000; CF4 = 50,000;
and then solve for IRR = 10.03%.