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Question #15: Martin Industries uses the Internal Rate of Return method and requires a return of...

Question #15: Martin Industries uses the Internal Rate of Return method and requires a return of 11%. Martin is considering the following independent projects:

Cash Flow for

Year

Project A

Project B

0

-$157,300

-$33,900

1

$74,000

$11,300

2

$87,000

$13,350

3

$46,000

$14,420

Required:

  1. Using the Internal Rate of Return method, should Martin accept or reject Project A? Project B?
  2. Why?
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Answer #1

Internal rate of return
Project A:
Using financial calculator
press CF 2nd CE/C
press CF
-157300
Enter
down arrow,
74000
Enter
down arrow (twice),
87000
Enter
down arrow (twice),
46000
Enter
down arrow (twice),

press IRR
Enter
press down arrow
press CPT
=16.2557%

As IRR is more than required return accept Project A

Project B:
Using financial calculator
press CF 2nd CE/C
press CF
-33900
Enter
down arrow,
11300
Enter
down arrow (twice),
13350
Enter
down arrow (twice),
14420
Enter
down arrow (twice),

press IRR
Enter
press down arrow
press CPT
=7.1428%

As IRR is less than required return reject Project B

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