Question

СР, 0 A project's internal rate of return (IRR) is the -Select- that forces the PV of its inflows to equal its cost. The IRR is an estimate of the project's rat of return, and it is comparable to the - Select on a bond. The equation for calculating the IRR is: NPV = CF. + CF + СР + ... + =0 (1 + IRR) (1 + ru (1 + R) CF (1 + IRR) CFt is the expected cash flow in Period t and cash outflows are treated as negative cash flows. There must be a change in cash flow signs to calculate the IRR. The IRR equation is simply the NPV equation solved for the particular discount rate that causes NPV to equal -Select- The IRR calculation assumes that cash flows are reinvested at the -Select- If the IRR is -Selectthan the project's risk-adjusted cost of capital, then the project should be accepted; however, if the IRR is less than the project's risk-adjusted cost of capital, then the project should be -Select- v. Because of the IRR reinvestment rate assumption, when -Select- projects are evaluated the IRR approach can lead to conflicting results from the NPV method. Two basic conditions can lead to conflicts between NPV and IRR: -Select differences (earlier cash flows in one project vs. later cash flows in the other project) and project size (the cost of one project is larger than the other). When mutually exclusive projects are considered, then the -Select- method should be used to evaluate projects. 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 9%. 0 1 2 المة Project A - 1,000 650 320 270 390 Project B -1,000 250 255 420 840 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 TRR method?

Answer 1

Fill in the blank Answers
1-	NPV equals to zero
2-	at a rate equal to IRR
3-	if the IRR is greater than
4-	The project should be rejected
5-	when unequal life projects are evaluated
6-	cash flow differences
7-	NPV method should be used to evaluate the projects
Project A
Year	0	1	2	3	4
cash flow	-1000	650	320	270	390
IRR =Using IRR function in MS excel	IRR(J49:N49)	26.47%
Project B
Year	0	1	2	3	4
cash flow	-1000	250	255	420	840
IRR =Using IRR function in MS excel	IRR(J54:N54)	21.42%
As per the IRR both project can be accepted as IRR of both the projects are greater than cost of capital of the company. As both the projects are independent Project A would be preferred as Its IRR is greater than project B

AutoSave Off H Booki - Excel Sign in X File Home Insert Page Layout Formulas Data Review View Help O Search Share Comments X Calibri 11 . AP = Wrap Text Percentage אלדד AY O IT WÉ TA Paste BIU A $ %) 68-08 E E Merge & Center Insert Delete Format Ideas Conditional Format as Cell Formatting Table Styles Styles Sort & Find & Filter Select Clipboard Font Alignment Number Cells Editing Ideas K50 X fx =IRR(349:N49) H I J o P Q R S T U V w х Y Z AA 1- 39 40 2- 3- 41 42 K L M N NPV equals to zero at a rate equal to IRR if the IRR is greater than The project should be rejected when unequal life projects are evaluated cash flow differences NPV method should be used to evaluate the projects 4- 43 5- 44 6- 45 7- 46 47 48 1 2 3 4 Project A Year 0 cash flow -1000 IRR EUsing IRR(349:N49) 49 650 320 270 390 50 26.47% 51 52 1 4 2 2551 Project B Year 0 cash flow -1000 IRR =Using IRR(J54:N54) 3 4201 53 54 55 56 57 840 250 21.42% As per the IRR both project can be accepted as IRR of both the projects are greater than cost of capital of the company. As both the projects are independent Project A would be preferred as Its IRR is greate 58 59 60 61 Sheet1 + Select destination and press ENTER or choose Paste @ + 100% x N P W O т 10:16 AM 7/30/2020