Question

determine the irr of each of these projects. which project should be accepted

To: The New Financial Analyst From: Mr. R. Harrison, CEO, Park Products Re: Capital-Budgeting Analysis Provide an evaluation of four proposed projects, all with 5-year expected lives and identical initial outlays of $110,000. All of these projects involve additions to Park's highly successful Avalon product line, and as a result, the required rate of return on all projects has been established at 10 percent. The expected free cash flows from each project are as follows: CASH FLOWS ($) I PROJECT A PROJECT D PROJECT C YEARS PROJECT B Initial outlay Inflow year 1 Inflow year 2 Inflow year 3 Inflow year 4 Inflow year 5 110,000 50,000 -110,000 -110,000 110,000 35,000 20,000 80,000 30,000 40,000 20,000 35,000 60,000 10,000 20,000 15,000 35,000 20,000 70,000 35,000 15,000 15,000 10,000 35,000 In evaluating these projects, please respond to the following questions: Source: Kenwn Martin Dathe Cei o

Answer 1

	N	A	B	C	D		E=A/(1.1^N)	F=B/(1.1^N)	G=C/(1.1^N)	H=D/(1.1^N)
		CASH FLOWS					PRESENT VALUE OF CASH FLOWS
	YEAR	PROJECT A	PROJECT B	PROJECT C	PROJECT D		PROJECT A	PROJECT B	PROJECT C	PROJECT D
	0	(110,000)	(110,000)	(110,000)	(110,000)		(110,000)	(110,000)	(110,000)	(110,000)
	1	20,000	50,000	80,000	35,000		18,182	45,455	72,727	31,818
	2	30,000	40,000	20,000	35,000		24,793	33,058	16,529	28,926
	3	60,000	10,000	15,000	35,000		45,079	7,513	11,270	26,296
	4	20,000	20,000	15,000	35,000		13,660	13,660	10,245	23,905
	5	70,000	10,000	15,000	35,000		43,464	6,209	9,314	21,732
	Internal Rate of Return (IRR)	20.00%	8.02%	15.34%	17.78%	TOTAL	35,179	(4,105)	10,085	22,678
	(Using IRR function of excel over Cash Flows)
		IRR	NPV (Net Present Value)
	PROJECT A	20.00%	35,179
	PROJECT B	8.02%	(4,105)
	PROJECT C	15.34%	10,085
	PROJECT D	17.78%	22,678
	PROJECT A,C and D are acceptable
	If only one project to be selected
	Project A should be selected