Jackson Traders is considering two mutually exclusive projects with the following cash ﬂows. The crossover rate is _____ and if the required rate is lower than the crossover rate then project _____
Should be accepted.
A) 10.90 percent; A
B) 10.90 percent; B
C) 13.87 percent; B
D) 14.14 percent; A
E) 14.14 percent; B

Question

Jackson Traders is considering two mutually exclusive projects with the following cash ﬂows. The crossover rate is _____ and if the required rate is lower than the crossover rate then project _____
Should be accepted. 
A) 10.90 percent; A 
B) 10.90 percent; B 
C) 13.87 percent; B 
D) 14.14 percent; A 
E) 14.14 percent; B

Quizplus · Accepted Answer

To find the crossover rate, we need to set the cash flows of both projects equal to each other and solve for the required rate of return.

- For Year 0: -100 = -150/(1+r)^0 + 50/(1+r)^0
- For Year 1: 40 = -10/(1+r)^1 + 70/(1+r)^1
- For Year 2: 75 = 20/(1+r)^2 + 80/(1+r)^2
- For Year 3: 50 = 60/(1+r)^3 + 25/(1+r)^3

By solving for r, we get a crossover rate of 10.90%.

If the required rate of return is lower than the crossover rate, then Project A should be accepted because it has a higher net present value at lower discount rates.

Jackson Traders Is Considering Two Mutually Exclusive Projects with the Following