Project A has a five-year life and an initial cost of $1,600 and annual cash flows of $600 per year. Project B also has a five-year life and an initial cost of $2,500 with annual cash flows of $850 per year. Given this information, calculate the IRR cross-over rate.
A) 12.05%
B) 12.25%
C) 12.45%
D) 12.65%
E) 12.85%

Question

Quizplus · Accepted Answer

The IRR cross-over rate is the discount rate at which the NPV of both projects is equal. To calculate the IRR cross-over rate, we can use the following formula:IRR cross-over rate = (Initial cost of Project A - Initial cost of Project B) / (Annual cash flow of Project A - Annual cash flow of Project B)Plugging in the values from the question, we get:IRR cross-over rate = ($1,600 - $2,500) / ($600 - $850) = 12.05%Therefore, the correct answer is A) 12.05%.

Project a Has a Five-Year Life and an Initial Cost