Question

ou are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should:

Answer 1

the options are missing:

1. Always accept Project A.
2. Accept Project B if the required return is less than 13.1 percent.
3. Be indifferent to the projects at any discount rate above 13.1 percent.
4. Accept Project B only when the required return is equal to the crossover rate.
5. Always accept Project A if the required return exceeds the crossover rate.

the answer is:

5. Always accept Project A if the required return exceeds the crossover rate.

The crossover point tells us that one project must be chosen if the IRR is higher than the cross over point, but if the IRR is lower, then the other alternative should be selected.

In this case, the cross over point is 12.3% and we are told that project A should be selected if the required IRR is 13.1%. That tells us that the alternative that we must choose above 12.3% is project A. Project B should be selected if the IRR is less than 12.3%.