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Compute what is the crossover rate

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As the CFO for Proctle and Gampbor, you are the main decision maker for project selection. Two of your division heads have submitted proposals for funding for their projects. You have assessed that the risk of both projects is similar so the required return on the projects is set at the company's cost of capital, which is currently 10%.

You have projected the following cash flows for the projects:

                                          0                    1                  2                     3                   4                      5

Project Campspell            -$50.00             $10.00           $0.00        $25.00      $40.00            $5.00

Project Oral Cal                  -$100.00           $80.00          $30.00       $5.00        $5.00           $5.00

You do not have sufficient capital to do both, so you need to choose one or the other.

You generally use a combination of NPV and IRR to make your decisions.

Question a. Which would you choose based upon NPV?

Question b. Which would you choose based upon IRR?

You decide to do secondary look at these projects by calculating the Incremental IRR (aka Crossover Rate).

Question c. What is the Crossover Rate?

Question d. Which project do you choose and why (briefly)?

Reference no: EM132589593

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