Project X's IRR is 19% and Project Y's IRR is 17%.The projects have the same risk and the same lives,and each has constant cash flows during each year of their lives.If the WACC is 10%,Project Y has a higher NPV than X.Given this information,which of the following statements is correct?
A)The crossover rate between the two projects must be less than 10%.
B)The crossover rate between the two projects must be greater than 10%.
C)If the WACC is 8%, Project X will have the higher NPV.
D)If the WACC is 18%, Project Y will have the higher NPV.

Question

Quizplus · Accepted Answer

DThe crossover rate is the discount rate at which the NPVs of two projects are equal. Since Project Y has a higher NPV than Project X at a WACC of 10%, and given that Project Y's IRR is lower than Project X's IRR, the crossover rate must be greater than 10%. This is because as the discount rate increases from the crossover point, the project with the lower IRR (Project Y) will have a higher NPV than the project with the higher IRR (Project X) until the discount rate reaches the IRR of the project with the higher IRR. Additionally, if the WACC is 18%, which is closer to Project X's IRR of 19% than to Project Y's IRR of 17%, the NPV of Project Y would be higher than that of Project X because the NPV decreases as the discount rate approaches the IRR from below.

Project X's IRR Is 19% and Project Y's IRR Is