Bellinger Industries is considering two projects for inclusion in its capital bu
ID: 1176015 • Letter: B
Question
Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%.
0 1 2 3 4
Project A -900 500 320 380 310
Project B -900 430 315 395 400
What is Project Delta's IRR? Do not round intermediate calculations. Round your answer to two decimal places. %
Explanation / Answer
Note: We have calculated project A and B > IRR, Project Delta is not defined in question
IRR is rate where present value of all cash flows become Zero i.e. at that rate NPV = 0.
We have to obtain IRR by trial error method i.e. by fixing different rate to get NPV = 0
Below, we have displayed IRR at particular rate where we got NPV = 0 for both the project.
.
Project A:
IRR = 26.78%
Discount rate = R =
26.78%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$900.00
1.000000
-$900.00
1
$500.00
0.788791
$394.40
2
$320.00
0.622191
$199.10
3
$380.00
0.490778
$186.50
4
$310.00
0.387122
$120.01
Total of PV = NPV =
$0.00
Project B:
IRR = 25.73%
Discount rate = R =
25.73%
Present Values
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$900.00
1.000000
-$900.00
1
$430.00
0.795325
$341.99
2
$315.00
0.632542
$199.25
3
$395.00
0.503077
$198.72
4
$400.00
0.400110
$160.04
Total of Present values = NPV =
$0.00
Discount rate = R =
26.78%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$900.00
1.000000
-$900.00
1
$500.00
0.788791
$394.40
2
$320.00
0.622191
$199.10
3
$380.00
0.490778
$186.50
4
$310.00
0.387122
$120.01
Total of PV = NPV =
$0.00
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