Question

Construct an investment opportunity ranking using the following information on four independent projects using IRR: Project CEO II $4 million $8 million $7 million $6 million Annual CF $1.1 million $2.8 million $2.1 million $2.0 million Project Life 5 years 4 years 5 years 4 years III IV O I, II, III, IV O II, III, IV, I O III, II, IV, I O IV, III, II, I

Answer 1

Project 1

IRR (r) is given by

-4 + 1.1/r*(1-1/(1+r)^5) = 0

Solving for r using Excel's SOLVER tool,

r= 0.1165 or 11.65%

So, IRR of project 1 is 11.65%

Project 2

IRR (r) is given by

-8 + 2.8/r*(1-1/(1+r)^4) = 0

Solving for r using Excel's SOLVER tool,

r= 0.1496 or 14.96%

So, IRR of project 2 is 14.96%

Project 3

IRR (r) is given by

-7 + 2.1/r*(1-1/(1+r)^5) = 0

Solving for r using Excel's SOLVER tool,

r= 0.1524 or 15.24%

So, IRR of project 3  is 15.24%

Project 4

IRR (r) is given by

-6 + 2/r*(1-1/(1+r)^4) = 0

Solving for r using Excel's SOLVER tool,

r= 0.1259 or 12.59%

So, IRR of project 4 is 12.59%

So, as per IRR criteria, the projects can be ranked as

Project 3> Project 2> Project 4>Project 1

or III, II, IV, I (3rd option)