Suppose project Acquisition and project Merger are mutually exclusive.Project Acquisition requires an initial cash outlay of $50,000 and is expected to provide after-tax cash flows of $15,000 in year 1,$25,000 in year 2,$20,000 in year 3,and $15,000 in year 4.Project Merger requires an initial cash outlay of $75,000 and is expected to provide after-tax cash flows of $20,000 in year 1,$28,000 in year 2,$35,000 in year 3,and $20,000 in year 4.The appropriate discount rate is 12 percent.What is the crossover rate?

Question

Quizplus · Accepted Answer

Crossover rate (CR)= IRR of the incremental project (Merger - Acquisition)
CFs of project (Merger - Acquisition): -$25,000,$5,000,$3,000,$15,000,and $5,000 11ea8229_347f_ebe8_bbd8_7b7edfef80a1_TB1726_00 Using a financial calculator (TI BA II Plus):
[CF][2nd][CLR WORK]
CF0=-25,000,C01=5,000,F01=1,C02=3,000,F02=1,C03=15,000,F03=1,C04=5,000,F04=1,IRR CPT.
CR = 4.30%

Suppose Project Acquisition and Project Merger Are Mutually Exclusive