Question

The IRR-Mutually exclusive projects 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: firm's cost of capital is 15% 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? a. The internal rate of return (IRR) of project X is % (Round to two decimal places.) Is project X acceptable on the basis of IRR? (Select the best answer below.) A Data Table O O No Yes (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) The internal rate of return (IRR) of project Y is %. (Round to two decimal places.) Is project Y acceptable on the basis of IRR? (Select the best answer below.) Project X S500,000 Project Y $330,000 Initial investment (CF) Year (1) Ο O Νο Yes Cash inflows (CF) $130,000 $120,000 $130,000 $130,000 $170,000 $115,000 $210,000 $70,000 $270,000 $50,000 b. Which project is preferred? (Select the best answer below.) O A. Project X O B. Project Y O C. Neither Print Done

Answer 1

a

Project X
IRR is the rate at which NPV =0
IRR	0.205360653
Year	0	1	2	3	4	5
Cash flow stream	-500000	130000	130000	170000	210000	270000
Discounting factor	1	1.205361	1.452894	1.751262	2.1109019	2.544398
Discounted cash flows project	-500000	107851.5	89476.57	97072.87	99483.545	106115.5
NPV = Sum of discounted cash flows
NPV Project X =	3.62634E-08
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	20.54%
Accept project as IRR is more than discount rate
b
Project Y
IRR is the rate at which NPV =0
IRR	0.169234309
Year	0	1	2	3	4	5
Cash flow stream	-330000	120000	130000	115000	70000	50000
Discounting factor	1	1.169234	1.367109	1.598471	1.8689867	2.185283
Discounted cash flows project	-330000	102631.3	95091.18	71943.77	37453.451	22880.33
NPV = Sum of discounted cash flows
NPV Project Y =	4.69252E-06
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	16.92%
Accept project as IRR is more than discount rate

c

Project X is preferred as it has higher IRR