Question

Pierce Chocolates and Berry Sweets both have new projects that require an initial investment of $450,000 and will have annual cash inflows of $110,000. If Pierce expects its project to last 5 years and Berry expects its project to last 6 years, which one has the higher internal rate of return?

Answer 1

Step-by-step explanation:

Using a financial calculator, input the following using the "CF" button;

Pierce Chocolates has 5 years of cash inflows;

Initial investment ; CF0 = - 450,000

Yr1 Cashflow; CF1 = 110,000

Yr2 Cashflow; CF2 = 110,000

Yr3 Cashflow; CF3 = 110,000

Yr4 Cashflow; CF4 = 110,000

Yr5 Cashflow; CF5 = 110,000

Then compute Internal rate of return; IRR CPT = 7.09%

Berry Sweets has 6 years of cash inflows;

Initial investment ; CF0 = - 450,000

Yr1 Cashflow; CF1 = 110,000

Yr2 Cashflow; CF2 = 110,000

Yr3 Cashflow; CF3 = 110,000

Yr4 Cashflow; CF4 = 110,000

Yr5 Cashflow; CF5 = 110,000

Yr6 Cashflow; CF6 = 110,000

Then compute Internal rate of return; IRR CPT = 12.18% hence higher.