Consider two projects, X and Y. Project X's IRR is 19% and Project Y's IRR is...

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Finance

Consider two projects, X and Y. Project X's IRR is 19% andProject Y's IRR is 17%. The projects have the same risk and thesame lives, and each has constant cash flows during each year oftheir lives. If the cost of capital is 10%, Project Y has a higherNPV than X. Given this information, which of the followingstatements is CORRECT?
a.
The crossover rate must be greater than 10%.
b.
If the cost of capital is 8%, Project X will have the higherNPV.
c.
If the cost of capital is 18%, Project Y will have the higherNPV.
d.
Project X is larger in the sense that it has the higher initialcost.
e.
The crossover rate must be less than 10%.
I know A is correct, but just would like to know the logic to itas I have no idea how the answer is A. Thanks.

Answer & Explanation Solved by verified expert

4.1 Ratings (683 Votes)

Answer Option A is correct Explanation The rate of return at which the net present value or NPV of two projects are equal is referred to as the crossover rate Internal rate of return or IRR of project Y17 IRR of Project X19 See Answer

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Consider two projects, X and Y. Project X's IRR is 19% andProject Y's IRR is 17%. The projects have the same risk and thesame lives, and each has constant cash flows during each year oftheir lives. If the cost of capital is 10%, Project Y has a higherNPV than X. Given this information, which of the followingstatements is CORRECT? a.The crossover rate must be greater than 10%.b.If the cost of capital is 8%, Project X will have the higherNPV.c.If the cost of capital is 18%, Project Y will have the higherNPV.d.Project X is larger in the sense that it has the higher initialcost.e.The crossover rate must be less than 10%.I know A is correct, but just would like to know the logic to itas I have no idea how the answer is A. Thanks.

	a.	The crossover rate must be greater than 10%.
	b.	If the cost of capital is 8%, Project X will have the higherNPV.
	c.	If the cost of capital is 18%, Project Y will have the higherNPV.
	d.	Project X is larger in the sense that it has the higher initialcost.
	e.	The crossover rate must be less than 10%.