1) Garage, Inc., has identified the following two mutually exclusive projects: W

Question

1) Garage, Inc., has identified the following two mutually exclusive projects:    

  

What is the IRR for each of these projects? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

  

  

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

  

If the required return is 10 percent, what is the NPV for each of these projects? (Do not round intermediate calculations and round your final 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 and round your final answer to 2 decimal places. (e.g., 32.16))

  

2) What is the IRR of the following set of cash flows? (Round your answer to 2 decimal places. (e.g., 32.16))

%

Year Cash Flow (A) Cash Flow (B) 0 –$ 29,500 –$ 29,500 1 14,900 4,550 2 12,800 10,050 3 9,450 15,700 4 5,350 17,300

Explanation / Answer

Internal Rate of Return(IRR) is the rate at which Net Present Value(NPV) of the project is zero

Question 1

a-1

Project A

Assuming rate is 19%

The IRR may be between 19% and 20%

Using Interpolation method

=19%+{(Cash Inflow at 19%-Cash outflow)/(Cash Inflow at 19%-Cash Inflow at 20%)}

=19%+[(29835.58-29500)/(29835.58-29354.36)]

=19+0.7%

=19.70%

Project B

Assuming Rate 18%

Hence IRR will be in between 18% and 19%

By using Interpolation method

18%+{(Cash Inflow at 18%-Cash outflow)/(Cash Inflow at 18%-Cash Inflow at 19%)}

=18%+0.08%
=18.08%

Hence IRR of the Projects

a-2

Using the IRR decision rule Project A should be accepted.Since higher the IRR more the returns occurs

Answer is Project A

a-3 Yes

b-1 If the rate of return is 10%
Project A

Project B

b-2

NPV of the Project B is higher than NPV of Project A

Hence Project B to be accepted

c.Indifference is situation where the NPV of the two projects are same

By using Interpolation Indifference Point is 14.42%

Question 2

IRR is between 19% and 20%

By using Interpolation method

19%+{(NPV at 19%-0)/(NPV at 19%-NPV at 20%)

19%+0.61%

Hence IRR is 19.61%

NPV at 19% Year Cashflow DISC -29500 1 14900 0.840336 12521.01 2 12800 0.706165 9038.91 3 9450 0.593416 5607.779 4 5350 0.498669 2667.878 NPV 335.58

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