Corporate Finance Q65
65Capital budgeting projects A and B have similar outlays, but different patterns of future cash flows. The required rate of return for both projects is 12 percent, at which the NPV and IRR turn out to be as follows:
| Cash Flows | |||||||
| Year | 0 | 1 | 2 | 3 | 4 | NPV | IRR(%) |
| Project A | -50 | 0 | 0 | 0 | 110 | 17.77 | 21.79 |
| Project B | -50 | 22 | 22 | 22 | 22 | 15.02 | 27.18 |
The discount rate which would result in the same NPV for both projects is:
- Option : C
- Explanation : For these projects, a discount rate of 15.09 percent would yield the same NPV for both (an NPV of 11.03). The cross over point needs to be before the lower IRR (21.79). Note: The discount rate (crossover point) at which both the projects have the same NPV is the IRR for the differences in cash flows of the projects. For instance, in this case, it is CF0 = 0, CF1 = -22, CF2 = -22, CF3 = -22, CF4 = 88, CPT IRR. IRR = 15.09%.
Accessibility
Oversized Widget
Saved in this browser. Nothing changes for anyone else.