Garage, Inc., has identified the following two mutually exclusive projects: Year
ID: 2770313 • Letter: G
Question
Garage, Inc., has identified the following two mutually exclusive projects:
Year Cash Flow (A) Cash Flow (B)
0 –$ 29,200 –$ 29,200
1 14,600 4,400
2 12,500 9,900
3 9,300 15,400
4 5,200 17,000
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
Part a-1
To calculate IRR, we can use IRR function in excel
Year
CF A
CF B
0
-29200
-29200
1
14600
4400
2
12500
9900
3
9300
15400
4
5200
17000
IRR
19.02%
17.68%
Part a-2
Project A should be selected as it has higher IRR.
Part a-3
This is a mutually exclusive project which suggests to use NPV method. Decision taken based on IRR rule, is not necessarily correct.
Part b-1
To compute NPV, we need to compute present value of cash flows and add them.
Project A
Year
CF A
PV factor 10%
PV
0
-29200
1
-29200
1
14600
0.909090909
13272.73
2
12500
0.826446281
10330.58
3
9300
0.751314801
6987.228
4
5200
0.683013455
3551.67
NPV
4942.203
NPV= 4942.20.
Project B
Year
CF A
PV factor 10%
PV
0
-29200
1
-29200
1
4400
0.909090909
4000
2
9900
0.826446281
8181.818
3
15400
0.751314801
11570.25
4
17000
0.683013455
11611.23
NPV
6163.295
NPV of project B = 6163.30
b-2
Project B should be chosen as it has higher NPV.
Year
CF A
CF B
0
-29200
-29200
1
14600
4400
2
12500
9900
3
9300
15400
4
5200
17000
IRR
19.02%
17.68%
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