Question

Bruin, Inc. has identified the following two mutually exclusive projects Cash Flow (A) -$28.700 14,100 12.000 9.050 4.950 Cash Flow (B) -$28,700 4,150 9.650 14.900 16.500 6-1 What is the IRR for each of these projects (Do not round Intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e... 32.16.) Project A Project B 2-2 Using the IRR decision rule, which project should the company accept? Project A Project B &-3 is this decision necessarily correct? Yes NO

Answer 1

Correct Answer:

Requirement 1:

IRR
Project A	18.03%
Project B	17.27%

Using the IRR decision rule, Project A should be accepted.

The decision is not necessarily correct.

Requirement 2:

NPV @ 12%
Project A	$        3,043.04
Project B	$        3,789.85

Project B, should be chosen, if using the NPV decision rule.

Working:

Project A
Year	Cash Inflows	PV factor at 12%	Present value
1	14100.000	$              0.8929	$    12,589.29
2	12000.000	$              0.7972	$      9,566.33
3	9050.000	$              0.7118	$      6,441.61
4	4950.000	$              0.6355	$      3,145.81
Total			$    31,743.04
(-) Initial Cost			$    28,700.00
Net Present Value (NPV1)			$      3,043.04

Project B
Year	Cash Inflows	PV factor at 12%	Present value
1	4150.000	$              0.8929	$      3,705.36
2	9650.000	$              0.7972	$      7,692.92
3	14900.000	$              0.7118	$    10,605.53
4	16500.000	$              0.6355	$    10,486.05
Total			$    32,489.85
(-) Initial Cost			$    28,700.00
Net Present Value (NPV1)			$      3,789.85

For calculation of IRR we need one more discount rate at which the NPV of the project is less than zero.

For project A, R2 = 20%

For project B, R2 = 20%

IRR = R1+( NPV1/(NPV1-NPV2) * (R2-R1)

Project A
Year	Cash Inflows	PV factor at 20.%	Present value
1	14100.000	$            0.8333	$         11,750.00
2	12000.000	$            0.6944	$            8,333.33
3	9050.000	$            0.5787	$            5,237.27
4	4950.000	$            0.4823	$            2,387.15
Total			$         27,707.75
(-) Initial Cost			$         28,700.00
Net Present Value (NPV2)			$             (992.25)

Project 2
Year	Cash Inflows	PV factor at 20%	Present value
1	4150	$            0.8333	$            3,458.33
2	9650	$            0.6944	$            6,701.39
3	14900	$            0.5787	$            8,622.69
4	16500	$            0.4823	$            7,957.18
Total			$         26,739.58
(-) Initial Cost			$         28,700.00
Net Present Value (NPV)			$         (1,960.42)

Project A
NPV1	$        3,043.04
NPV2	$          (992.25)
NPV1-NPV2	$        4,035.28
NPV1/(NPV1-NPV2)	$                 0.75
R1	12.0%
R2	20.0%
R2-R1	8.0%
IRR	18.03%

Project B
NPV1	$        3,789.85
NPV2	$      (1,960.42)
NPV1-NPV2	5,750.27
NPV1/(NPV1-NPV2)	$          0.65907
R1	12%
R2	20%
R2-R1	8%
IRR	17.27%

End of Answer.

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