Epsilon company is considering investing in Project X or Project Y. Project X ge

Question

Epsilon company is considering investing in Project X or Project Y. Project X generates the following cash flows: year "zero" 311 dollars (outflow): year 1 258 dollars(inflow; year 2 - 264 dollars (inflow): year 3 382 dollars (inflow; year 4 - 158 dollars (inflow). Project Y generates the following cash flows: year "zero" 230 dollars (outflow); year 1 - 120 dollars (inflowl: year 2 100 dollars (inflow); year 3 - 200 The MARR is 10%. Compute the External Rate of Return (ERR) of the BEST project. (note1: if your answer is 10.25% then write 10.25 as your answer, not 0.1025) (note2: round your answer to two decimal places, and do not include spaces, currency signs, plus or minus signs, or commas) dollars (inflow); year 4 120 dollars (inflow)

Explanation / Answer

NPV of Project X: -311+258/1.1+264/1.1^2+382/1.1^3+158/1.1^4=536.6457

NPV of Project Y: -230+120/1.1+100/1.1^2+200/1.1^3+120/1.1^4=193.96

Hence, Best project is X

Project Y:

Year 0: -230

Year 1: 0

Year 2: 0

Year 3:

Year 4: 120+200*1.1+100*1.1^2+120*1.1^3=620.72

So, -230+620.72/(1+ERR)^4=0

Hence, ERR=28.171%

Project X:

Year 0: -311

Year 1: 0

Year 2: 0

Year 3:

Year 4: 158+382*1.1+264*1.1^2+258*1.1^3=1241.038

So, -311+1241.038/(1+ERR)^4=0

Hence, ERR=41.377%

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