The firm XYZ is considering two investment projects: project L and project S. Both projects take three years to complete and require an initial investment outlay of $200,000. On one hand, the firm expects the following cash flows from project L: CF1 = 20,000; CF2 =120,000; CF3 =160,000. On the other hand, the firm expects the following cash flows from project S: CF1 = 140,000; CF2 =100,000; CF3 =40,000. Do NPV profiles of these two projects cross over? If so, what is the cross-over rate?

Cross over rate is the IRR at which both the projects would have same NPV.

Answered: The firm XYZ is considering two…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 7P: Your division is considering two investment projects, each of which requires an up-front expenditure...

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The firm XYZ is considering two investment projects: project L and project S. Both projects take three years to complete and require an initial investment outlay of $200,000. On one hand, the firm expects the following cash flows from project L: CF₁= 20,000; CF₂ =120,000; CF₃ =160,000. On the other hand, the firm expects the following cash flows from project S: CF₁= 140,000; CF₂ =100,000; CF₃ =40,000. Do NPV profiles of these two projects cross over? If so, what is the cross-over rate?

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