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

Question

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

What is the IRR for each of these projects? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

IRR=

Project A %

Project B %

Using the IRR decision rule, which project should the company accept? Project A OR Project B?

Is this decision necessarily correct? YES OR NO?

If the required return is 11 percent, what is the NPV for each of these projects? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

NPV=

Project A $=

Project B $=

Which project will the company choose if it applies the NPV decision rule? Project A OR Project B?

At what discount rate would the company be indifferent between these two projects? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Discount rate %=

YEAR CASH FLOW A CASH FLOW B 0 $-29300.00 $-29300.00 1 14700.00 4450.00 2 12600.00 9950.00 3 9350.00 15500.00 4 5250.00 17100.00

Explanation / Answer

1. Project A IRR = 19%, Project B IRR = 18%

2. SShould accept Project A as project A generates a higher IRR.

3. The decision can not necessarily be correct as IRR should be viewed in conjunction with NPV to determine what value it generates

4. Project A NPV = 4464.66 , Project B NPV = 5382.42

5. the company will choose project B as it generates a higher NPV and a higher IRR.

Year 0 Year 1 Year 2 Year 3 Year 4 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Cash flows -29300 4450 9950 15500 17100 Discount Rate 11.0% PV of cash flows -29300 4009.01 8075.64 11333.47 11264.30 NPV 5382.42

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