Inverness Corporation is considering investing in one of two mutually exclusive projects. The firm’s cost of capital is 15%. Project One’s NPV profile crosses the vertical axis at $1.8 million and crosses the horizontal axis at 25%. Project Two’s NPV profile crosses the vertical axis at $1.2 million and crosses the horizontal axis at 33%. For the two projects, the crossover rate is 18%.
Inverness should:
Accept project One
Accept project two
Reject both
The easiest way to solve these is to draw the digram.
At the company’s cost of capital project 1 has the highest NPV.
Note the blue and green lines should be curves but straight lines is good enough,
The questions hsould also state they are conventional projects with one cash outflow followed by a series of inflows as this means they both have one IRR. If one or both projects had multiple IRRs then we can’t answer the question from the information given.
