Garage, Inc., has identified the following two mutually exclusive projects: Year

Question

Garage, Inc., has identified the following two mutually exclusive projects:         Year Cash Flow (A) Cash Flow (B) 0 Garage, Inc., has identified the following two mutually exclusive projects:         Year Cash Flow (A) Cash Flow (B) 0 Garage, Inc., has identified the following two mutually exclusive projects:         Year Cash Flow (A) Cash Flow (B) 0 Garage, Inc., has identified the following two mutually exclusive projects:         Year Cash Flow (A) Cash Flow (B) 0 Garage, Inc., has identified the following two mutually exclusive projects:         Year Cash Flow (A) Cash Flow (B) 0 Garage, Inc., has identified the following two mutually exclusive projects:         Year Cash Flow (A) Cash Flow (B) 0 Garage, Inc., has identified the following two mutually exclusive projects:

Explanation / Answer

Project A

29200 = 14600/(1+IRR) + 12500/(1+IRR)^2 + 9300/(1+IRR)^3 + 5200/(1+IRR)^4

IRR = 19.016%

Project B

29200 = 4400/(1+IRR) + 9900/(1+IRR)^2 + 15400/(1+IRR)^3 + 17000/(1+IRR)^4

IRR = 17.682%

Project A should be chosen,

yes,

Project A

NPV = -29200+(14600/(1.1))+(12500/(1.1)^2)+(9300/(1.1)^3)+(5200/(1.1)^4)

NPV = $4942.20

Project B

NPV = -29200 + 4400/(1.1) + 9900/(1.1)^2 + 15400/(1.1)^3 + 17000/(1.1)^4

NPV = $6163.29

Project B should be chosen

for Equal NPV first we need to calculate the diff of cash flow and then equate it to zero NPV

Diff cash fl

(14600-4400) = 10200

(12500-9900) = 2600

(9300-15400) = -6100

(5200-17000) = -11800

0 = 10200/(1+IRR) + 2600/(1+IRR)^2 + (6100)/(1+IRR)^3 + (-11800)/(1+IRR)^4

IRR = 14.66%

at discount rate of 14.66% we can select any of the project.

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