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

To find the IRR cross-over rate, we need to set the cash flows of Project X equal to the cash flows of Project Y and then solve for the discount rate that makes the two projects equal in value.

750 - 350(PVIFA(r%, 3)) = 500 - 300(PVIFA(r%, 1)) - 225(PVIFA(r%, 2)) - 200(PVIFA(r%, 3))

Using a financial calculator or Excel, we can solve for the discount rate that makes both projects equal in value, which is approximately 12.21%.

Therefore, Project X is the better choice as it has a higher IRR than the cross-over rate.

Project X Has a Cost of $750 and a Three