Project A has a five-year life and an initial cost of $2,000 and annual cash flows of $700 per year. Project B also has a five-year life and an initial cost of $3,000 with annual cash flows of $950 per year. Given this information, calculate the IRR cross-over rate.
A) 5.93%
B) 6.93%
C) 7.93%
D) 8.93%
E) 9.93%

Question

Quizplus · Accepted Answer

The IRR cross-over rate is the discount rate at which the net present values (NPVs) of the two projects are equal. By calculating the differences in cash flows between the two projects and finding the IRR of these differences, we determine the cross-over rate to be 7.93%.

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