Kerron Company is presented with the following two mutually exclusive projects.
ID: 2758351 • Letter: K
Question
Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 17 percent. Year Project M Project N 0 –$145,000 –$360,000 1 64,000 150,000 2 82,000 185,000 3 73,000 135,000 4 59,000 115,000 Required: (a) 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).) IRR Project M % Project N % (b) What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) NPV Project M $ Project N $ (c) Which, if either, of the projects should the company accept?
Explanation / Answer
Part A
We can compute IRR using IRR function in excel.
We have following formula for IRR:
= IRR( values)
Year
M
N
0
-145000
-360000
1
64000
150000
2
82000
185000
3
73000
135000
4
59000
115000
IRR
32.73%
24.12%
So IRR for project M is 32.73% and project N is 24.12%.
Part B
We need to calculate PV of each cash flows and then add them all to get NPV:
Year
M
N
PV factor 17%
PV M
PV N
0
-145000
-360000
1
-$145,000.00
-$360,000.00
1
64000
150000
0.854701
$54,700.85
$128,205.13
2
82000
185000
0.730514
$59,902.11
$135,145.01
3
73000
135000
0.624371
$45,579.05
$84,290.03
4
59000
115000
0.53365
$31,485.35
$61,369.76
NPV
$46,667.37
$49,009.92
NPV project M = 46,667.37
NPV project N = 49,009.92
Project C
Since, the projects are mutually exclusive, the company should use NPV method to choose the project. Project N has higher NPV, therefore, project N should be chosen.
Year
M
N
0
-145000
-360000
1
64000
150000
2
82000
185000
3
73000
135000
4
59000
115000
IRR
32.73%
24.12%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.