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13 January, 14:59

Crenshaw Enterprises has gathered projected cash flows for two projects. Year Project I Project J 0 - $189,000 - $189,000 1 93,500 73,600 2 84,600 72,800 3 63,200 76,800 4 57,800 84,000 a. At what interest rate would the company be indifferent between the two projects

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  1. 13 January, 15:31
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    a. At what interest rate would the company be indifferent between the two projects

    10,47%

    Explanation:

    YEAR 1 YEAR 2 YEAR 3 YEAR 4

    -$189,000 $93,500 $84,600 $63,200 $57,800 Proj I

    -$189,000 $73,600 $72,800 $76,800 $84,000 Proj J

    -$19,900 $11,800 - $13,600 - $26.200 Cash Dif.

    10,47% RATE

    To calculate the interest rate that will be indifferent between the projects to the company, we have to do the detailed:

    First find a third cash flow that emerge from the substrate of one project, the cash flow of the other project, in this way we will reach a third cash flow, the difference between the projects cash flow.

    Then we calculate the present value of the third cash flow, and the IRR obtained it's the interest rate indifferent between the two projects.

    To verify that this is the correct rate, we can apply the present value to each cash flow project and the Present value would be the same.

    Present Value Formula: CF / (1+r) ^t

    CF : Cash Flow Projected

    r : indifferent interest rate

    t : Each Period of the project.

    Discount Rate applied: 10,47%

    1 2 3 4 Year

    93.500 84.600 63.200 57.800 Proj I

    84.642 69.330 46.886 38.818 239.676 Present Value

    73.600 72.800 76.800 84.000 Proj J

    66.627 59.660 56.975 56.413 239.676 Present Value
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