Consider the following two mutually exclusive projects:

Year Cash Flow (X) Cash Flow (Y)

0 - $ 15,600 - $ 15,600

1 6,740 7,350

2 7,320 7,700

3 4,840 3,690

1. What is the IRR of Project X?

2. What is the IRR of Project Y?

3. What is the crossover rate for these two projects?

1) The IRR of Project X is 10.81%

2) The IRR of Project Y is 10.87%

3) Cross over rate = 9.65%

Explanation:

1) 0 = - $ 15,600 + 6,740/[1+IRR] + 7,320/[1+IRR]^2 + 4,840/[1+IRR]^3

IRR = 10.81%

Therefore, The IRR of Project X is 10.81%

2) 0 = - $ 15,600 + 7,350/[1+IRR] + 7,700/[1+IRR]^2 + 3,690/[1+IRR]^3

IRR Y = 10.87%

Therefore, The IRR of Project Y is 10.87%

3) Cross over rate = 9.65% i. e the rate at which NPVs are equal