Question

IRR: Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capac ity. The relevant cash flows for the projects are shown in the following table. The firm's cost of capital is 15%. Initial investment (CF) Year (1) Project X Project Y $500,000 $325,000 Cash inflows (CF) $100,000 $140,000 120,000 120,000 150,000 95,000 190,000 70,000 250,000 50,000 a. Calculate the IRR to the nearest whole percent for each of the projects. b. Assess the acceptability of each project on the basis of the IRRs found in part a. c. Which project, on this basis, is preferred?

Answer 1

к L M 1 Year Project X Project Y 0 -500000 - 325000 1 100000 140000 2 120000 120000 3 150000 95000 4 190000 70000 5 250000 50000 8 IRR= 15.67% 17.29% 9 Formula used: IRR(L2:17) IRR(M2:M7)

Part a:

IRR of project X=16% (Rounded to nearest whole number)

IRR of project Y=17% (Rounded to nearest whole number)

Part b:
According to the IRR decision rule, if the IRR is greater than the cost of capital, then a project should be accepted.
Here, the cost of capital is 15%,
IRR of project X=16% (Can be accepted)
IRR of project Y=17% (Can be accepted)

Part c:
Mutually exclusive projects are a set of projects out of which only one project can be accepted.
As we need to select only one project, we need to select the project with highest IRR.
So, project Y will be preferred