Question

Chestnut Tree Farms has identified the following two mutually exclusive projects. Picture Over what range of discount rates would you choose Project A?

a. 7.13 percent or less.
b. 7.13 percent or more.
c. 6.38 percent or more.
d. 6.38 percent or less.
e. 6.57 percent or more.

Answer 1

D) 6.38 percent or less.

Step-by-step explanation:

Year Cash Flow (A) Cash Flow (B)

0 -$40,000 -$40,000

1 $11,300 $17,400

2 $14,800 $14,100

3 $13,700 $12,900

4 $7,900 $2,200

first we must subtract cash flows from A by the cash flows from B:

1 $11,300 - $17,400 = -$6,100

2 $14,800 - $14,100 = $700

3 $13,700 - $12,900 = $800

4 $7,900 - $2,200 = $5,700

then we calculate the IRR = 6.38% (using an excel spreadsheet) 0 indifference rate

if the discount rate = 6.38% or less, then you should choose project A

project A is selected below the indifference rate and not above it since it originally had a lower IRR than project B.