Garage, Inc., has identified the following two mutually exclusive projects: Year
ID: 2720115 • Letter: G
Question
Garage, Inc., has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$ 28,000 –$ 28,000 1 13,400 3,800 2 11,300 9,300 3 8,700 14,200 4 4,600 15,800 a-1 What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) IRR Project A % Project B % a-2 Using the IRR decision rule, which project should the company accept? Project A Project B a-3 Is this decision necessarily correct? Yes No b-1 If the required return is 10 percent, what is the NPV for each of these projects? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV Project A $ Project B $ b-2 Which project will the company choose if it applies the NPV decision rule? Project A Project B c. At what discount rate would the company be indifferent between these two projects? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Discount rate %
Explanation / Answer
a)
Compute the IRR of the project using excel function:
IRR of project A.
IRR(-28000,13400,11300,8700,4600) = 16.13%.
IRR of project B.
IRR(-28000,3800,9300,14200,15800) = 16.02%.
a2)
Based on the IRR the the project with highest IRR will be selected and thus, Project A is selected.
a3)
The decision is always not correct and thus compare with Net present value.
b1)
Compute NPV of Project A.
Compute the NPV of project B.
Based on NPV, the project with highest NPV should be selected and thus, Project B should be selected.
Year Cash Flows Discount @10% Present value of cash flows 0 -28000 1 -28000 1 13400 0.909090909 12181.81818 2 11300 0.826446281 9338.842975 3 8700 0.751314801 6536.438768 4 4600 0.683013455 3141.861895 Net Present Value 3198.96182Related Questions
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