Suppose your firm is considering two mutually exclusive, required projects with
ID: 2697873 • Letter: S
Question
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk classes is 8 percent, and that the maximum allowable payback and discounted payback statistics for the projects are 2 and 3 years, respectively.
Time:
0
1
2
3
Project A Cash Flow
–20,000
10,000
30,000
1,000
Project B Cash Flow
–30,000
10,000
20,000
50,000
Use the IRR decision rule to evaluate these projects; which one(s) should be accepted or rejected
Time:
0
1
2
3
Project A Cash Flow
–20,000
10,000
30,000
1,000
Project B Cash Flow
–30,000
10,000
20,000
50,000
Explanation / Answer
irr for project A
0 = -20000 +10000/(1+IRR) +30000/(1+IRR)^2+1000/(1+IRR)^3
irr=51.32%
which is greater than i=8% ,hence project accepted
irr for project B
0 = -30000 +10000/(1+IRR) +20000/(1+IRR)^2+50000/(1+IRR)^3
irr =50.82%
which is greater than i=8% ,hence project accepted
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