Question

Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the​ firm's warehouse capacity. The relevant cash flows for the projects are shown in the following​ table:

Project X		Project Y
Initial investment ​(CF 0CF0​)	​$500,000		​$310,000
Year ​(t​)	Cash inflows ​(CF Subscript tCFt​)
1	​$130,000		​$140,000
2	​$130,000		​$140,000
3	​$130,000		​$85,000
4	​$180,000		​$90,000
5	​$270,000		​$30,000

The​ firm's cost of capital is 16​%.

a.  Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs.

b.  Which project is​ preferred?

Answer 1

YEAR cash flows Project Y -$500,000 $310,000 $130,000 $140,000 $130,000 $140,000 $130,000 $85,000 $180,000 $90,000 $270,000 $30,000 17.49% 21.51% IRR(B3:B8) IRR(C3:08) 12 if mutually exclusive accept project Y, as having high IRR