Question

Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 8%. 2 4 360 310 Project A1,050705 Project B1,050 320 200 400 305 655 What is Project Delta's IRR? Round your answer to two decimal places.

Answer 1

Let IRR of Project A be i_a and Project B be i_b

IRR is the rate at which NPV = 0

Project A:

-1050 + 705/(1+i_a) + 360/(1+i_a)² + 200/(1+i_a)³ + 310/(1+i_a)⁴ = 0

Solving the above equation gives i_a = 23.26%

Project B:

-1050 + 320/(1+i_b) + 305/(1+i_b)² + 400/(1+i_b)³ + 655/(1+i_b)⁴ = 0

Solving the above equation gives i_b = 18.92%

Since WACC is 8% and i_b > WACC and is closer to WACC as compared to i_a, Project B should be selected