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AN INTERNAL RATE OF RETURN PROBLEM NOW, REFER TO THE TABLE IN PROBLEM 6 ABOVE THE CASH FLOWS ASSUMED, INCLUDING THE INVESTMENT ARE NOW GIVEN IN THE TABLE BELOW FOR PROJECTS A AND B PROJECTA 1,000 450 425 350 450 PROJECT B 1,000 550 300 475 300 WHICH PROJECT WOULD YOU CHOOSE USING INTERNAL RATE OF RETURN ANALYSIS? BE SURE TO CHECK FOR CONSISTENCY OF THE INTERNAL RATES OF RETURN THAT YOU DERIVE FOR THESE PROJECTS, AND THE CONSISTENCY OF IRR WITH NET PRESENT VALUE INFORMATION. WHY WOULD YOU MAKE THE CHECK FOR CONSISTENCY?
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Project A Project B -1,000 550 Year EXCEL SCREENSHOT 1,000 1 ect A 1,000 Year Project B 2 1,000 425 350 450 24.74% 475 300 24.88% 475 IRR 450 IRR IRR(B2:B6) IRR(C2:C6) IRRs can be calculated using EXCEL FUNCTION IRR(values, guess) inserting cash flows in B2 thru C6 as per EXCEL SCREENSHOT copied above IRR stands for Internal Rate of Return which is the discount rate that makes projects future cash equals to initial investment or in other words, IRR is the rate which makes NPV equals to zero Higher the IRR, higher the acceptability of a project. That is, project shall be accepted if IRR is greater than the cost of capital associated with the project. If the projects are mutally exclusive, firm must choose Project B as it yields the higher IRR of 24.88% than Project-As IRR of 24.74%. When there are more than one cash outflows during the life of the project, there can be a possiblity for more than one IRR to the same project. If there are more than one IRR, the evaluators cannot make any concrete decision about the project being evaluated with respect to what rate of return the project should yield in order to continue with the project or not. Only when the management is sure about the minimum rate of return required from the project being evaluated, financing options can be properly planned for the project. If not sure, firm may choose those financing options with higher cost of capital than the projects minimum required rate of return which in turn will have negative impact on firms solvency position badly

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