Question

Management of Crane Automotive, a manufacturer of auto parts, is considering investing in two projects. The company typically compares project returns to a cost of funds of 17.00 percent. Year Project 1 Project 2 0 - $463,905 - $536,132 1 296,000 118,750 2 107,000 164,170 3 130,500 264,700 4 126,000 289,050 Compute the IRRs based on the cash flows. Which project(s) will be accepted? (Round final answer to 2 decimal places, e.g. 15.25%.) The IRR of project 1 is % and the project should be . The IRR of project 2 is % and the project should be .

Answer 1

Ans IRR of Project 1 is 19.09%

IRR of Project 2 is 17.40%

Project 1
Year	Project Cash Flows (i)	DF@ 10%	DF@ 10% (ii)	PV of Project ( (i) * (ii) )	DF@ 20% (iii)	PV of Project A ( (i) * (iii) )
0	-463905	1	1	(4,63,905.00)	1	(4,63,905.00)
1	296000	1/((1+10%)^1)	0.909	2,69,090.91	0.833	2,46,666.67
2	107000	1/((1+10%)^2)	0.826	88,429.75	0.694	74,305.56
3	130500	1/((1+10%)^3)	0.751	98,046.58	0.579	75,520.83
4	126000	1/((1+10%)^4)	0.683	86,059.70	0.482	60,763.89
		NPV		77,721.94	NPV	(6,648.06)
	IRR =	Ra + NPVa / (NPVa - NPVb) * (Rb - Ra)
		10% + 77721.94 / (77721.94 + 6648.06) * 10%
		19.09%

Project 2
Year	Project Cash Flows (i)	DF@ 10%	DF@ 10% (ii)	PV of Project ( (i) * (ii) )	DF@ 20% (iii)	PV of Project A ( (i) * (iii) )
0	-536132	1	1	(5,36,132.00)	1	(5,36,132.00)
1	118750	1/((1+10%)^1)	0.909	1,07,954.55	0.833	98,958.33
2	164170	1/((1+10%)^2)	0.826	1,35,677.69	0.694	1,14,006.94
3	264700	1/((1+10%)^3)	0.751	1,98,873.03	0.579	1,53,182.87
4	289050	1/((1+10%)^4)	0.683	1,97,425.04	0.482	1,39,395.25
		NPV		1,03,798.30	NPV	(30,588.60)
	IRR =	Ra + NPVa / (NPVa - NPVb) * (Rb - Ra)
		10% + 103798.3 / (103798.3 + 30588.60) * 10%
		17.40%