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 10%.

	0		1		2		3		4
Project A	-1,200		630		330		290		350
Project B	-1,200		230		265		440		800

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?

-Select-NeitherProject AProject BBoth projects A and BCorrect 1 of Item 3

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

-Select-Neither Project AProject BBoth projects A and BCorrect 2 of Item 3

Could there be a conflict with project acceptance between the NPV and IRR approaches when projects are mutually exclusive?

-Select-YesNoCorrect 3 of Item 3

The reason is -Select-the NPV and IRR approaches use the same reinvestment rate assumption and so both approaches reach the same project acceptance when mutually exclusive projects are considered.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.Correct 4 of Item 3

Reinvestment at the -Select-IRRWACCCorrect 5 of Item 3 is the superior assumption, so when mutually exclusive projects are evaluated the -Select-NPVIRRCorrect 6 of Item 3 approach should be used for the capital budgeting decision.

Answer 1

IRR(internal rate of return )is the rate at which the NPV=0

Here IRR can be computed using the excel function =IRR()

The IRR for project A can be computed using the formula=IRR(B2:B6) we get IRR as 14.44%

The IRR for Project B can be computed using the formula =IRR(C2:C6) we get IRR as 13.22%

If the projects were independent Both Projects A and B would be accepted.Since they both have IRR's higher than cost of capital.(wacc=10%)

If the projects were mutually exclusive Project A would be accepted since Project A has the highest IRR of the two.

Yes there could be a conflict with the project acceptance between NPV and IRR methods when projects are mutually exclusive

The Reason is 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 WACC is the superior assumption,so when mutually exclusive projects are evaluated the NPV approach should be used for the capital budgeting decision.

BS Book1 - Excel (Product Activation Failed) X File Home Insert Page Layout Formulas Data Review View Developer Tell me what you want to do... ie Calibri 11 - AA pe Wrap Text Percentage * Cut Copy Paste Format Painter Clipboard WE L Insert Delete Format Sign in & Share AutoSum - Fill - Sort & Find & Clear - Filter - Select - Editing BIU A Merge & Center - $ %) 6.000 .00 0 Conditional Format as Cell Formatting Table Styles Styles Font Г Alignment Number Cells B7 X f =IRR(B2:36) A B с D E F G — H J K L M N P 0 R S T U 1 Year 2 Year o 3 Year 1 Project A Project B -1,200 -1,200 630 230 330 265 290 440 4 Year 2 5 Year 3 6 Year 4 7 IRR 350 14.44% 800 13.22% 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Sheet1 + - Ready + 100%