Answer:
D) 6.38 percent or less.
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.
