What is the IRR for each of these projects? (Do not round intermediate calculati

Question

   

  

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.)

  

  

Using the IRR decision rule, which project should the company accept?

If the required return is 12 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.)

  

  

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.)

  

Purple Inc., has identified the following two mutually exclusive projects:

Explanation / Answer

IRR is the rate of return which makes NPV zero, in other words, sum of PVs of all cash flow is equal to the initial outflow in a conventional cash flow pattern.

In case of two Mutually exclusive projects, we have to choose one only. Both NPV and IRR rule would give different results, we must go with NPV rule.

We can use Cash Flow function in a financial calculator or IRR formula in an excel spreadsheet. We need any of these tools because of hit an trail method to arrive at a rate to make NPV zero

A2. using the IRR decision rule company should accept Project A as it has higher IRR

A3. The decision is NOT necessarily correct as IRR is just a discount rate, actual value addition can be found using NPV rule.

B1. see the calculation above

B2. Which project will the company choose if it applies the NPV decision rule? It has to be the project B because of higher NPV

C. Try calculating the NPV for different required rates of return. One useful function in excel is "what-if-analysis". At discount rate 15.65% NPV of both the projects is same i.e. $352.75. see the calculation below;

Year Cash Flow (A) PV of CF (A) Cash Flow (B) PV of CF (B) 0 -28,100 -28,100.00 -28,100 -28,100.00 1 13,500 12,053.57 3,850 3,437.50 2 11,400 9,088.01 9,350 7,453.76 3 8,750 6,228.08 14,300 10,178.46 4 4,650 2,955.16 15,900 10,104.74 IRR 16.39% 16.16% NPV 2224.82 3074.46

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