Kerron Company is presented with the following two mutually exclusive projects.
ID: 2757618 • Letter: K
Question
Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 19 percent.
What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Year Project M Project N 0 –$143,000 –$362,000 1 64,200 149,000 2 82,200 187,000 3 73,200 134,000 4 59,200 117,000Explanation / Answer
A)
PROJECT M
IRR = Where NPV is equal to zero
Year
Cash flows
Present value factor (33%)
Present value
Present value factor (34%)
Present value
0
-143000
1
-143000
1
-143000
1
64200
0.7518797
48270.6767
0.74626866
47910.45
2
82,200
0.56532308
46469.5574
0.55691691
45778.57
3
73,200
0.42505495
31114.0223
0.41560963
30422.63
4
59,200
0.31959019
18919.7391
0.31015644
18361.26
NPV
1773.99539
NPV
-527.096
IRR = 33% + (1774 – 0) / [1774 – (-527.10)]
= 33.77%
PROJECT N
IRR = Where NPV is equal to zero
Year
Cash flows
Present value factor (23%)
Present value
Present value factor (24%)
Present value
0
-3,62,000
1
-362000
1
-362000
1
1,49,000
0.81300813
121138.211
0.80645161
120161.3
2
1,87,000
0.66098222
123603.675
0.6503642
121618.1
3
1,34,000
0.53738392
72009.4451
0.52448726
70281.29
4
1,17,000
0.43689749
51117.0069
0.4229736
49487.91
NPV
5868.34
NPV
-451.4
IRR = 23% + (5868.34 – 0) / [5868 – (-451.40)]
= 23.92%
B)
NPV
PROJCET M
PROJCET N
Year
Cash flows
Present value factor (19%)
Present value
Present value factor (19%)
Present value
0
-143000
1
-143000
-3,62,000
1
-362000
1
64200
0.84033613
53949.5798
1,49,000
0.84033613
125210.084
2
82,200
0.70616482
58046.7481
1,87,000
0.70616482
132052.821
3
73,200
0.59341581
43438.0376
1,34,000
0.59341581
79517.7191
4
59,200
0.49866875
29521.1901
1,17,000
0.49866875
58344.2439
NPV
41955.5556
NPV
33124.87
C) COMPANY SHOULD ACCEPT PROJECT M HAVING IRR AND NPV GREATER THAN PROJECT N
Year
Cash flows
Present value factor (33%)
Present value
Present value factor (34%)
Present value
0
-143000
1
-143000
1
-143000
1
64200
0.7518797
48270.6767
0.74626866
47910.45
2
82,200
0.56532308
46469.5574
0.55691691
45778.57
3
73,200
0.42505495
31114.0223
0.41560963
30422.63
4
59,200
0.31959019
18919.7391
0.31015644
18361.26
NPV
1773.99539
NPV
-527.096
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