Question

Following is information on two alternative investments being considered by Tiger Co. The company requires a 4% return from its investments. Project X1 Project X2 Initial investment $ (80,000 ) $ (120,000 ) Expected net cash flows in: Year 1 25,000 60,000 Year 2 35,500 50,000 Year 3 60,500 40,000 Compute the internal rate of return for each of the projects using Excel functions. Based on internal rate of return, indicate whether each project is acceptable. (Round your answers to 2 decimal places.)

Answer 1

To calculate the internal rate of return (IRR) for each project, use the Excel function IRR with the range of cash flows. Then compare the calculated IRRs to the required return of 4% to determine project acceptability.

Step-by-step explanation:

To compute the internal rate of return (IRR) for each project, you can use the Excel function IRR. In Excel, you can use the formula =IRR(range of cash flows). For Project X1, the initial investment is -$80,000 and the expected net cash flows are $25,000 in Year 1, $35,500 in Year 2, and $60,500 in Year 3. For Project X2, the initial investment is -$120,000 and the expected net cash flows are $60,000 in Year 1, $50,000 in Year 2, and $40,000 in Year 3. So, you can use the formulas =IRR(-$80,000, $25,000, $35,500, $60,500) and =IRR(-$120,000, $60,000, $50,000, $40,000) to calculate the IRR for each project.

The internal rate of return (IRR) represents the discount rate at which the net present value (NPV) of an investment becomes zero. If the IRR is higher than the required return of 4%, the project is considered acceptable. If the IRR is lower than 4%, the project is not considered acceptable. Comparing the calculated IRRs to the required return of 4%, you can determine whether each project is acceptable or not.

Answer 2

20.34% and 12.99%

Step-by-step explanation:

The computation of the internal rate of return is shown below:

($) ($)

Particulars Project X 1 Project X 2

Initial Investment -80,000 -1,20,000

Year 1 cash inflow 25,000 60,000

Year 2 cash inflow 35,500 50,000

Year 3 cash inflow 60,500 40,000

Internal rate of return 20.34% 12.99%

Based on the internal rate of return, both the projects are acceptable

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