Project X has a cost of $750 and a three year annual cash flow of $350 per year. Project Y has a cost of $500 and a three year annual cash flow of $300, $225 and $200. Given this information, calculate the IRR cross-over rate.
A) 12.21%
B) 13.21%
C) 14.21%
D) 15.21%
E) 16.21%

Question

Quizplus · Accepted Answer

The IRR cross-over rate is found by equating the NPVs of both projects and solving for the discount rate. The equation for the cross-over rate is derived from the NPV formula: NPV = ∑(Cash Flow / (1 + r)^t) - Initial Investment, where r is the discount rate and t is the time period. For Project X, the cash flows are $350 for three years, and for Project Y, the cash flows are $300, $225, and $200 for each respective year. Setting their NPVs equal and solving for r gives us the cross-over rate of approximately 12.21%.

Project X Has a Cost of $750 and a Three