Question

Piercy, LLC, has identified the following two mutually exclusive projects: Year 0 Cash Flow (A) Cash Flow (B) -$55,000 -$55,000 31,000 18,500 25,000 22,500 18,500 27,000 13,000 25,500 ĐWN a-1. What is the IRR for each of these projects? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a-2. If you apply the IRR decision rule, which project should the company accept? b-1. Assume the required return is 11 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.) b-2. Which project will you choose of you apply the NPV decision rule? C-1. Over what range of discount rates would you choose Project A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-2. Over what range of discount rates would you choose Project B? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) At what discount rate would you be indifferent between these two projects? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a-1. Project A Project B a-2. b-1. Project A Project B b-2. C-1. C-2. d. Discount rate

Answer 1

A B D cash flows YEAR Projec A -$55,000 $31,000 $25,000 $18,500 $13,000 25.71% IRR(B3:37) Project B -$55,000 $18,500 $22,500 $27,000 $25,500 23.53% IRR(C3:07) pv @ 11% 1.0000 0.9009 0.8116 0.7312 0.6587 NPV E F discounted cash flows Projec A Project B -$55,000.00 -$55,000.00 $27,927.93 $16,666.67 $20,290.56 $18,261.50 $13,527.04 $19,742.17 $8,563.50 $16,797.64 $15,309.03 $16,467.98 incremental cash flows $110,000 -$49,500 -$47,500 -$45,500 -$38,500 a-1) Project A Project B IRR 25.71% 23.53% a-2) Project A b-1) NPV Project A $15,309.03 Project B $16,467.98 b-2) Project B C-1 Above 24.50% accept Project A C-2 Below 24.50% accept Project B 22 d) Discount rate 24.50% IRR(G3:G7)