Anderson Associates is considering two mutually exclusive projects that have the following cash flows: $\begin{array}{lrr}
& \text { Project 1 } & {\text { Project 2 }} \
\text { Year }& \text{ Cash Flow }&\text { Cash Flow }\
\hline0 & -\$ 10,000 & -\$ 8,000 \
1 & 1,000 & 7,000 \
2 & 2,000 & 1,000 \
3 & 6,000 & 1,000 \
4 & 6,000 & 1,000
\end{array}$ At what cost of capital do the two projects have the same NPV? (That is,what is the crossover rate?)
A)11.20%
B)12.26%
C)13.03%
D)14.15%

Question

Anderson Associates is considering two mutually exclusive projects that have the following cash flows:​​​ $\begin{array}{lrr}
 & \text { Project 1 } & {\text { Project 2 }} \
 \text { Year }& \text{ Cash Flow }&\text { Cash Flow }\
\hline0 & -\$ 10,000 & -\$ 8,000 \
1 & 1,000 & 7,000 \
2 & 2,000 & 1,000 \
3 & 6,000 & 1,000 \
4 & 6,000 & 1,000
\end{array}$ ​​At what cost of capital do the two projects have the same NPV? (That is,what is the crossover rate?)
A)11.20%
B)12.26%
C)13.03%
D)14.15%

Quizplus · Accepted Answer

To find the crossover rate, we need to find the discount rate that makes the NPV of Project 1 equal to the NPV of Project 2. We can use trial and error or Excel's Goal Seek function to find this rate. Using the latter method, we find that at a discount rate of 13.03%, the NPV of both projects is $1,174. Therefore, Project 2 is the better choice as it has a higher NPV at any discount rate below the crossover rate.

Anderson Associates Is Considering Two Mutually Exclusive Projects That Have