Question

Bausch Company is presented with the following two mutually exclusive projects. The required return for both projects is 20 percent. Year Project M. -$142,000 64,300 82,300 73,300 59,300 Project N. -$363,000 148,500 188,000 133,500 118,000 a. What is the IRR for each project? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) C. Which, if either, of the projects should the company accept? Project M Project N Project M Project N c. Accept project

Answer 1

a
Project M
IRR is the rate at which NPV =0
IRR	0.342984844
Year	0	1	2	3	4
Cash flow stream	-142000	64300	82300	73300	59300
Discounting factor	1	1.342985	1.803608	2.422219	3.2530029
Discounted cash flows project	-142000	47878.43	45630.75	30261.51	18229.311
NPV = Sum of discounted cash flows
NPV Project M =	3.04086E-05
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	34.30%
Project N
IRR is the rate at which NPV =0
IRR	0.238332266
Year	0	1	2	3	4
Cash flow stream	-363000	148500	188000	133500	118000
Discounting factor	100.00%	1.238332	1.533467	1.898941	2.3515204
Discounted cash flows project	-363000	119919.3	122598	70302.33	50180.3
NPV = Sum of discounted cash flows
NPV Project N =	1.39553E-08
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	23.83%
b
Project M
Discount rate	0.2
Year	0	1	2	3	4
Cash flow stream	-142000	64300	82300	73300	59300
Discounting factor	1	1.2	1.44	1.728	2.0736
Discounted cash flows project	-142000	53583.33	57152.78	42418.98	28597.608
NPV = Sum of discounted cash flows
NPV Project M =	39752.7
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Project N
Discount rate	0.2
Year	0	1	2	3	4
Cash flow stream	-363000	148500	188000	133500	118000
Discounting factor	1	1.2	1.44	1.728	2.0736
Discounted cash flows project	-363000	123750	130555.6	77256.94	56905.864
NPV = Sum of discounted cash flows
NPV Project N =	25468.36
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

c

Accept project M as it has higher IRR and NPV