Question

Internal Rate of Return Analysis Cooper Corporation must evaluate two capital expenditure proposals. Cooper's hurdle rate is \(10 \%\). Data for the two proposals follow.

$$ \begin{array}{|l|c|c|} \hline & \text { Proposal X } & \text { Proposal Y } \\ \hline \text { Required investment } & 170,000 & 170,000 \\ \hline \text { Annual after-tax cash inflows } & 37,000 & \\ \hline \text { After-tax cash inflows at the end of years } 3,6,9, \text { and } 12 & & 109,000 \\ \hline \text { Life of project } & 12 \text { years } & 12 \text { years } \\ \hline \end{array} $$

What is the internal rate of return for Proposal X? For Proposal Y?

Use Excel to compute your answers.

Round answers to the nearest whole percentage (ex: \(0.1854=1996\) )

Proposal X

Proposal Y

Answer 1

INTERNAL RATE OF RETURN
	PROJECT X	PROJECT Y
Investment required	-170,000	-170,000
Cash flow 1	37,000	0
Cash flow 2	37,000	0
Cash flow 3	37,000	109,000
Cash flow 4	37,000	0
Cash flow 5	37,000	0
Cash flow 6	37,000	109,000
Cash flow 7	37,000	0
Cash flow 8	37,000	0
Cash flow 9	37,000	109,000
Cash flow 10	37,000	0
Cash flow 11	37,000	0
Cash flow 12	37,000	109,000
IRR EXCEL FUNCTION	19.09%	15.02%
ANSWERS
PROJECT X	19%	rounded off
PROJECT Y	15%	rounded off