Kerron Company is presented with the following two mutually exclusive projects.

Question

Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 18 percent. Year Project M Project N 0 –$137,000 –$368,000 1 64,800 146,000 2 82,800 193,000 3 73,800 131,000 4 59,800 123,000 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

(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).)

Project M

Using Excel Formula

IRR = irr(values)

IRR = irr({-137000,64800,82800,73800,59800})

IRR = 37.04%

Alternatively Using Equation & Trial-Run Method

At IRR PV of Cash Inflow is equal to PV of cash outflow

137000 = 64800/(1+r) + 82800/(1+r)^2 + 73800/(1+r)^3 + 59800/(1+r)^4

Solving the above equation by trial run method

IRR = 37.04%

Project N

Using Excel Formula

IRR = irr(values)

IRR = irr({-368000,146000,193000,131000,123000})

IRR = 23.37%

Alternatively Using Equation & Trial-Run Method

At IRR PV of Cash Inflow is equal to PV of cash outflow

368000 = 146000/(1+r) + 193000/(1+r)^2 + 131000/(1+r)^3 + 123000/(1+r)^4

Solving the above equation by trial run method

IRR = 23.37%

Project M 37.04%

Project N 23.37%

(b) What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

Project M

NPV = -137000 + 64800/(1+18%) + 82800/(1+18%)^2 + 73800/(1+18%)^3 + 59800/(1+18%)^4

NPV = $ 53,142.06

Project N

NPV = -368000 + 146000/(1+18%) + 193000/(1+18%)^2 + 131000/(1+18%)^3 + 123000/(1+18%)^4

NPV = $ 37511.08

Project M $ 53142.06

Project N $ 37511.08

(c) Which, if either, of the projects should the company accept?

Projects M should the company accept

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