Intro

You've estimated the following cash flows (in $ million) for two mutually exclusive projects:

Year	Project A	Project B
0	-28	-43
1	30	45
2	40	50

Attempt 1/5 for 10 pts.

Part 1

What is the crossover rate, i.e., the discount rate at which both projects have the same NPV?

The crossover rate is the discount rate at which both projects have the same NPV:

NPV(A) = NPV(B) NPV(A) - NPV(B) = 0 NPV(A-B) = 0

	A	B	C	D
1	Year	Project A	Project B	Difference A-B
2	0	-28	-43	15
3	1	30	45	-15
4	2	40	50	-10

NPV of cash flow differences:

NPVAB =(CF0,ACF0,B)+CF1,ACF1,B1+r+CF2,ACF2,B(1+r)2=0NPVA-B =(CF0,A-CF0,B)+CF1,A-CF1,B1+r+CF2,A-CF2,B(1+r)2=0

15+151+r+10(1+r)2=015+-151+r+-10(1+r)2=0

We can use the quadratic formula, trial and error, a financial calculator or Excel's IRR function to solve for r. Using Excel: =IRR(D2:D4)

We then find that the crossover rate is 45.74%, or 0.457.Correct

Part 2

What is project A's NPV at the crossover rate?