Question

Tyde Company is presented with the following two mutually exclusive projects. The required return for both projects is 14 percent.

Year. PROJECT A. PROJECT B

0. -$140,000. -$365000

1. 64,500. 147,500

2. 82,500. 190,000

3. 73,500. 132,500

4. 59,500. 120,000

a. What is the IRR for each project? ( Do not round intermediate calculations and enter answer as a percent rounded to 2 decimal places)

b. What is the NPV for each project?

c. Which, if either, of the projects should the company accept?

Answer 1

U 1 Year V W Project A Project B 0 -140000 -365000 64500 147500 82500 190000 73500 132500 59500 120000 35.38% 23.65% 64899.20 71068.15 IRR= 8 NPV=

V 1. W 1 Year 20 4 5 2 3 Project A Project B - 140000 -365000 64500 147500 82500 190000 73500 132500 59500 120000 =IRR(V2:16) =IRR(W2:W6) =V2+NPV(14%,V3:V6) =W2+NPV(14%, W3:W6) 7 IRR= 8 NPV=

Part a:
IRR of project A is 35.38%
IRR of project B is 23.65%

Part b:
NPV of project A is $64899.20
NPV of project B is $71068.15

Part c:
Given that the projects are mutually exclusive, it means out of a set of projects only one project can be selected.
So, the project with higher NPV should be accepted because it will increase the shareholders' value by higher amount. Hence, project B should be accepted.