Question

Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 12%. 0 2 4 250 Project A Project B -1,110 -1,110 790 390 350 285 300 750 400 What is Project A's IRR? Do not round intermediate calculations. Round your answer to two decimal places. % What is Project B's IRR? Do not round intermediate calculations. Round your answer to two decimal places. % If the projects were independent, which project(s) would be accepted according to the IRR method? Project A If the projects were mutually exclusive, which project(s) would be accepted according to the IRR method? Neither Could there be a conflict with project acceptance between the NPV and IRR approaches when projects are mutually exclusive? Yes The reason is the NPV and IRR approaches use the same reinvestment rate assumption and so both approaches reach the same project acceptance when mutually exclusive projects considered. v Reinvestment at the WACC is the superior assumption, so when mutually exclusive projects are evaluated the NPV approach should be used for the

If the projects were independent, which project(s) would be accepted according to the IRR method?

a) Neither

b) Project A

c) Project B

d) Both Projects A or B

If the projects were mutually exclusive, which project(s) would be accepted according to the IRR method?

a) Neither

b) Project A

c) Project B

d) Both Projects A or B

The reason is

a) TheNPV and IRR approaches use the same reinvestment rate assumption and so both approaches reach the same project acceptance when mutually exclusive projects are considered.

b) The NPV and IRR approaches use different reinvestment rate assumptions and so there can be a conflict in project acceptance when mutually exclusive projects are considered.

Reinvestment at the--Select----is the superior assumption, so when mutually exclusive projects are evaluated the -Select---approach should be used for the capital budgeting decision.

a) IRR a)NPV

b) WACC b)IRR

Answer 1

Project A

Internal rate of return can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$1,110. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
• Cash flow for each of the fifteen years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 24.80%.

Project B

Internal rate of return can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$1,110. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
• Cash flow for each of the fifteen years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 20.26%.

If the projects were independent, both the projects should be accepted since both have an internal rate of return higher than the cost of capital.

If the projects were mutually exclusive, Project A must be accepted since it generates the largest internal rate of return.

Yes, there could be a conflict with project acceptance when projects are mutually exclusive.

The reason is the NPV and IRR approaches use different reinvestment rate assumptions so there can be a conflict in project acceptance when mutually exclusive projects are considered.

Reinvestment at WACCis the superior assumption, so when mutually exclusive projects are evaluated the NPV approach should be used for the capital budgeting decision.

In case of any query, kindly comment on the solution.