Jackson Jets is considering two mutually exclusive projects. The projects have the following cash flows:
Project A Project B -
Time Cash FlowsC ash Flows -
0-$10,000-$8,000
1 1,000 7,000
2 2,000 1,000
3 6,000 1,000
4 6,000 1,000
At what cost of capital, do the two projects have the same net present value?
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A. B. C. D. E.Explanation
Find the differential cash flows by subtracting B's cash flows from A's cash flows for each year.
CF(0) = -2,000 -
CF(1) = -6,000 -
CF(2) = 1,000 -
CF(3) = 5,000 -
CF(4) = 5,000 -
Enter these cash flows and solve for the IRR = crossover rate = 13.03%.