Ryngaert Industries uses the NPV method to establish its capital budget, and it is now considering two mutually exclusive projects whose after-tax cash flows are shown below: If the required rate of return is below some rate, then Project L should be selected, whereas if the required rate of return is above that rate then Project S should be selected.What is the "crossover" rate at which the NPV profiles of these projects intersect?

Question

Ryngaert Industries uses the NPV method to establish its capital budget, and it is now considering two mutually exclusive projects whose after-tax cash flows are shown below:  If the required rate of return is below some rate, then Project L should be selected, whereas if the required rate of return is above that rate then Project S should be selected.What is the "crossover" rate at which the NPV profiles of these projects intersect?

Quizplus · Accepted Answer

The crossover rate is the discount rate at which the NPVs of the two projects are equal. To find the crossover rate, we need to set the NPV of Project L equal to the NPV of Project S and solve for the discount rate:

-$240,000 + (A/P, 11%)($200,000) = -$400,000 + (A/P, r%)($600,000)
where r is the discount rate.

Simplifying and solving for r, we get:
r = 11.88%

Therefore, if the required rate of return is below 11.88%, Project L should be selected and if the required rate of return is above 11.88%, Project S should be selected. Since the required rate of return is not given in the question, we cannot determine which project is the best choice in this case.

Ryngaert Industries Uses the NPV Method to Establish Its Capital