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 11%.

	0		1		2		3		4
Project A	-1,250		730		360		270		315
Project B	-1,250		330		295		420		765

What is the IRR of Project A and of Project B?

Answer 1

Let irr be x%
At irr,present value of inflows=present value of outflows.

A:

1,250=730/1.0x+360/1.0x^2+270/1.0x^3+315/1.0x^4

Hence x=irr=15.7%(Approx).

B:

1,250=330/1.0x+295/1.0x^2+420/1.0x^3+765/1.0x^4

Hence x=irr=14.10%(Approx).