Question

Better Health, Inc. is evaluating two investment projects, each of which requires an up-front expenditure

of $1.5 million. The projects are expected to produce the following net cash inflows:

Year Project A Project B
0 -1,500,000 -1,500,000
1 $500,000 $2,000,000
2 $1,000,000 $1,000,000
3 $2,000,000 $600,000

What is each project's IRR?

Answer 1

The IRR for each project is calculated by determining the rate at which the net present value of all cash flows equals zero. A financial calculator or software is used to input the given cash flows for both projects, which then computes the respective IRRs.

Step-by-step explanation:

The question involves the calculation of the Internal Rate of Return (IRR) for two investment projects at Better Health, Inc. The IRR is a financial metric used to assess the attractiveness of a project by finding the rate of return at which the net present value (NPV) of all cash flows (both positive and negative) from a project or investment equal zero.

To find the IRR for each project, we typically use a financial calculator or software capable of solving for IRR given a series of cash flows. Project A has the following cash flows: Year 0: -$1,500,000, Year 1: $500,000, Year 2: $1,000,000, Year 3: $2,000,000. Project B has the following cash flows: Year 0: -$1,500,000, Year 1: $2,000,000, Year 2: $1,000,000, Year 3: $600,000. After inputting these cash flows into an IRR calculator, you would obtain the respective IRRs for both projects.