Question: Suppose the Far North Airlines has two mutually exclusive projects: Setting up a hub in Far East, and Setting up a hub in Far West.

Suppose the Far North Airlines has two mutually exclusive projects: Setting up a hub in Far East, and Setting up a hub in Far West. Project East has an IRR of 12 percent and project West has an IRR of 15 percent. The crossover rate is 9 percent. The projects appropriate discount rate is 8 percent. Far North should______________.

Hint: Draw a 'hypothetical NPV profiles' for two projects. You can use slide 28 in Chapter 12 - Capital Budgeting. Then identify Crossover and IRRs on the 'hypothetical NPV profiles' graph (Replace the two IRRs and one Crossover in the slide with what the question has given you). Then identify where 'The projects appropriate discount rate' given in the question is and decide about the projects.

Option A: Accept project East, and reject project West

Option B: Accept project West, and reject project East

Option C: Accept both projects

Option D: Reject both projects

Option E: Insufficient information. It will depend on the cash flows from the two projects

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