Problem 8-10 NPV versus IRR LO 3, 4] Romboski, LLC, has identified the following

Question

Problem 8-10 NPV versus IRR LO 3, 4] Romboski, LLC, has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) $ 60,000 36,000 30,000 21,000 14,000 -$ 60,000 23,000 27,000 32,000 25,000 Requirement 1: (a) What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answ percentage roundedto 2 decimal places (e.g., 32.16).) Intemal rate of return Project A Project B (b) If you apply the IRR decision rule, which project should the company accept? (click to select) Requirement 2: (a) Assume the required return is 11 percent What is the NPV for each of these projects? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g. 32.16),.) Net present value Project A Project B (b) Which project will you choose if you apply the NPV decision rule? Click to select)

Explanation / Answer

Year PROJECT A Project B cash flow cash flow 0 -60000 -60000 1 36000 23000 2 30000 27000 3 21000 32000 4 14000 25000 IRR 29.89% IRR 27.08% as per decision rule of IRR project A would be selected Year PROJECT A present value @11% Project B present value @11% cash flow cash flow 0 -60000 -60000 1 36000 32432.43 23000 20720.72 2 30000 24348.67 27000 21913.81 3 21000 15355.02 32000 23398.12 4 14000 9222.234 25000 16468.27 sum of present value of cash inflow 81358.36 sum of present value of cash inflow 82500.92 cash outflow -60000 cash outflow -60000 NPV 21358.36 NPV 22500.92 Project B should be selected as it is having highest NPV A over a range of 11% to 29.89% project A would be selected b over a range of 11% to 27.08% project B would be selected C c cross over rate project A project B 0 -60000 -60000 0 1 36000 23000 13000 2 30000 27000 3000 3 21000 32000 -11000 4 14000 25000 -11000 IRR 14.81% cross over rate 14.81%

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