Question

Use the following information for problems 1 to 5. Assume that the projects are mutually exclusive. Year Cash Flow (A) Cash Flow (B) 0 ($49,725) ($49,725) 1 $25,200 $11,200 2 $18,200 $16,390 3 $13,800 $16,300 4 $7,600 $27,500 1. What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct?

Answer 1

IRR For project A= 14.24%

IRR for project B = 14%

No

Step-by-step explanation:

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

IRR can be calculated using a financial calculator.

For project A ,

Cash flow in year 0 = ($49,725)

Cash flow in year one = $25,200

Cash flow in year 2 = $18,200

Cash flow in year 3 = 13,800

Cash flow in year 4 = $7,600

IRR = 14.24%

For project B,

Cash flow in year 0 = ($49,725)

Cash flow in year one = $11,200

Cash flow in year 2 = $16,390

Cash flow in year 3 = $16,300

Cash flow in year 4 = $27,500

IRR = 14%

the project with the higher IRR should be chosen. Therefore, project A woold be chosen

To find the IRR using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.

I hope my answer helps you