Question

Piercy, LLC, has identified the following two mutually exclusive projects: Year 0 O-NM Cash Flow (A) Cash Flow (B) -$52,000 $52,000 28,000 15,800 22,000 19,800 17,000 24,000 12,400 25,800 a-1. What is the IRR for each of these projects? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a-2. If you apply the IRR decision rule, which project should the company accept? b-1. Assume the required return is 11 percent. What is the NPV for each of these projects? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b-2. Which project will you choose of you apply the NPV decision rule? C-1. Over what range of discount rates would you choose Project A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) C-2. Over what range of discount rates would you choose Project B? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) d. At what discount rate would you be indifferent between these two projects? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a-1. Project A Project B a-2. b-1. Project A Project B b-2. C-2. d. Discount rateſ

Answer 1

ANS1 )    IRR OF A=23 %.

IRR OF B= 21%.

ANS 2) If we apply the IRR rule we will accept project A with a return of 23%.

Ans 3) NPV A= $ 11,679.44.

NPV B= $ 12,848.21

Ans 4) As per the NPV rule we will select Project B with NPV= $ 12,848.21.

Ans 5) Project A Discount Range= 11% to 23%

Ans 6) Project B Discount Range= 11% to 21%

Ans 7) As the minimum return is of 21 % that will act as a minimum discount rate at which we will be indifferent to the project.

Calculation Of NPV and IRR of project A

	INTEREST	11%
A
YEAR	CASH FLOW A	PRESENT VALUE
0	$    -52,000.00	$                   -52,000.00
1	$     28,000.00	$                     25,225.23
2	$     22,000.00	$                     17,855.69
3	$     17,000.00	$                     12,430.25
4	$     12,400.00	$                       8,168.26
	NPV	$                     11,679.44
	IRR	23%

Calculation of NPV and IRR of project B

	INTEREST	11%
B
YEAR	CASH FLOW A	PRESENT VALUE
0	$    -52,000.00	$           -52,000.00
1	$      15,800.00	$             14,234.23
2	$      19,800.00	$             16,070.12
3	$      24,000.00	$             17,548.59
4	$      25,800.00	$             16,995.26
	NPV	$             12,848.21
	IRR	21%