Question

Stuartco is now considering two independent projects utilizing the internal rate of return technique. project a has an initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. project b has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000.

(a) which projects should be accepted if the cost of capital is 15%?
(b) which projects should be accepted if the cost of capital is 10%

Answer 1

Project A and Project B should be accepted if the cost of capital is 15%.

Step-by-step explanation:

To determine which projects should be accepted, we need to calculate the internal rate of return (IRR) for each project and compare it to the cost of capital. The IRR is the discount rate at which the net present value (NPV) of the project is zero.

For Project A:

• Initial investment: -$120,000
• Cash inflows: $40,000 for each of the next four years

Using a financial calculator or spreadsheet program, we can calculate that the IRR for Project A is approximately 19.61%. Since the IRR of Project A (19.61%) is higher than the cost of capital (15%), Project A should be accepted.

For Project B:

• Initial investment: -$80,000
• Cash inflows: $25,000 for each of the next five years

Similarly, the IRR for Project B is approximately 16.62%. Since the IRR of Project B (16.62%) is also higher than the cost of capital (15%), Project B should also be accepted.