Homework SourseGarage Inc has identified the following two mutually exclusi
Garage, Inc., has identified the following two mutually exclusive projects: What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Using the IRR decision rule, which project should the company accept?
If the required return is 11 percent, what is the NPV for each of these projects? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
At what discount rate would the company be indifferent between these two projects? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
| Year | Cash Flow (A) | Cash Flow (B) | |||||
| 0 | –$ | 29,900 | –$ | 29,900 | |||
| 1 | 15,300 | 4,750 | |||||
| 2 | 13,200 | 10,250 | |||||
| 3 | 9,650 | 16,100 | |||||
| 4 | 5,550 | 17,700 |
Solution
a-1:
Calculation of the IRR for each these projects:
Year
Cash flows (A)
Cash flows @20%
Discounting
cash flows
1
$ 15,300
0.8333
$ 12,749
2
$ 13,200
0.69444
$ 9,167
3
$ 9,650
0.5787
$ 5,584
4
$ 5,550
0.48225
$ 2,676
$ 30,177
Therefore, IRR is 20% (approximately).
Year
Cash flows (B)
Cash flows @18.5%
Discounting
cash flows
1
$ 4,750
0.843882
$ 4,008.44
2
$ 10,250
0.71214
$ 7,299.44
3
$ 16,100
0.600959
$ 9,675.44
4
$ 17,700
0.507139
$ 8,976.36
$ 29,959.67
Therefore, IRR is 18.5% (approximately).
a-2:
Project – A (i.e., IRR is 20%) accepted compared to Project – B (i.e., IRR is 18.5%).
a-3:
Yes.
b-1:
Calculation of NPV:
Project- A:
Year
Cash flows (A)
Cash flows @11%
Discounting
cash flows
0
$ (29,900.00)
1
$ (29,900.00)
1
$ 15,300
0.9009
$ 13,784
2
$ 13,200
0.81162
$ 10,713
3
$ 9,650
0.73119
$ 7,056
4
$ 5,550
0.65873
$ 3,656
NPV
$ 5,309
Therefore, NPV of the Project A is $5,309
Project- B:
Year
Cash flows (B)
Cash flows@11%
Discounting
cashflows
0
$ (29,900.00)
1
$ (29,900.00)
1
$ 4,750
0.9009
$ 4,279.28
2
$ 10,250
0.81162
$ 8,319.11
3
$ 16,100
0.73119
$ 11,772.16
4
$ 17,700
0.65873
$ 11,659.52
NPV
$ 6,130.06
Therefore, NPV of the Project A is $6,130.
b-2:
Therefore, Project B is accepted (NPV is $6,130) compared Project A (NPV is $5,309).
| Year | Cash flows (A) | Cash flows @20% | Discounting |
| 1 | $ 15,300 | 0.8333 | $ 12,749 |
| 2 | $ 13,200 | 0.69444 | $ 9,167 |
| 3 | $ 9,650 | 0.5787 | $ 5,584 |
| 4 | $ 5,550 | 0.48225 | $ 2,676 |
| $ 30,177 |
