Reece Company is presented with the following two mutually exclusive projects. T

Question

Reece Company is presented with the following two mutually exclusive projects. The required return for both projects is 15 percent. Year Project M Project N 0 –$ 141,000 –$ 364,000 1 64,400 148,000 2 82,400 189,000 3 73,400 133,000 4 59,400 119,000 a. What is the IRR for each project? (Do not round intermediate calculations and enter your answers as a percent 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 and 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. Project M

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

141,000 = 64,400 /(1.0x) +82,400/ (1.0x)^2 +73,400 /(1.0x)^3+ $ 59,400 /(1.0x)^4      

Or x= 34.84%

Hence the IRR is 34.84%

Project N

Let the IRR be y.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

364,000 =148,000/(1.0y) + 189,000 / (1.0y)^2  + 133,000 /(1.0y)^3 +  119,000/(1.0y)^4

Or y= 23.74%

Hence the IRR is 23.74%

b.

NPV of Project = Present Value of Cash Inflow - Present Value of cash Outflow

Project M

= $ 64,400 *1/ ( 1.15) ^ 1 + $ 82,400  *1/ ( 1.15) ^ 2 + $ 73,400 *1/ ( 1.15) ^ 3 + $ 59,400 *1/ ( 1.15) ^ 4 - $ 141,000

= $ 200,530.07- $ 141,000

= $ 59,530.07

Project N

= $ 148,000 *1/ ( 1.15) ^ 1 + $ 189,000  *1/ ( 1.15) ^ 2 + $ 133,000 *1/ ( 1.15) ^ 3 + $ 119,000 *1/ ( 1.15) ^ 4 - $ 364,000

= $ 427,095.10- $ 364,000

= $ 63,095.10

c. Since the Net Present Value of Project N is higher, the Project N should be accepted.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.