Pretty good question Two projects being considered by a firm are mutually exclusive and have the following projected cash flows: ------------------------------------------------------------------------------------------- Year…Project A Cash Flow…Project B Cash Flow …0…-4.0…??? …1…3.0…1.7 …2…5.0…3.2 …3…2.0…5.8 The crossover rate of the two projects’ NPV profiles is 9%. What is the initial cash flow for project B? A. -$4.22 B. -$4.51 C. $4.51 D. $8.73

a

C

Very interested in a good method for solving this… aside from plug and chug. (although you’d only have to go with the two negative values, I guess)

Answer A.

Boy that was fast!!!

A. A cross over rate is the rate at which both project has the same NPV, which is 4.5. Plug in the 4 possible choice and -4.22 is the cloest one.

A -$4.22 Crossover rate gives the same NPV for both projects. NPV for project A @ 9% is 4.5 Now just find the initial outflow that gives project B the same NPV of 4.5

yes, A it is:)

all the usual, we’re just missing pepp and everyone that’s normally here answered lol

…just like throwing food in a fish bowl…ha.

how do you calculate this particulary on BA II. I assume at crossover rate both projects will have equal NPV. So ??? should be PV of 1.7, 3.2 and 5.8 at 9%.

I calculated the NPV for the first one, then computed NPV for the second with a zero starting value, and subracted the first NPV from this number. A

yep it’s A… pretty good question, i didn’t solve it properly the first time around

supersharpshooter Wrote: ------------------------------------------------------- > Pretty good question > > yeah it is – and I am lost on it, this sucks, as time passes, I forget what I learned weeks ago. I used to be good at corporate finance : ( can someone break it out ??

Lloyd Wrote: ------------------------------------------------------- > I calculated the NPV for the first one, then > computed NPV for the second with a zero starting > value, and subracted the first NPV from this > number. > > A Good method mate! S

NPV of first is 4.51 4.51 = -X +1.7/1.09+ 3.2/(1.09^2)+5.8/(1.09^3), solve for X

daj224 Wrote: ------------------------------------------------------- > supersharpshooter Wrote: > -------------------------------------------------- > ----- > > Pretty good question > > > > > > > yeah it is – and I am lost on it, this sucks, as > time passes, I forget what I learned weeks ago. I > used to be good at corporate finance : ( > > can someone break it out ?? The crossover rate is the rate at which their NPV’s are equal (take a look at an NPV profile) - this means that the NPV of project A equals project B at 9%. Find the NPV of project A ($4.51), find the NPV of project B with an initial cash outflow of 0 ($8.73) and so for the NPV’s to be equal project B’s initial outflow must be (8.73-4.51) = 4.22 outflow

Map_1. Thanks for posting the ‘REAL’ way to do it.

A)