Question

Following is information on two alternative investments being considered by Tiger Co. The company requires a 7% return from its investments Project X1 $ (116,000) Project X2 (192,000) Initial investment Expected net cash flows in year: 43,000 53,500 78,500 87,000 1 2 77,000 67,000 3 Compute the internal rate of return for each of the projects using Excel functions. Based on internal rate of return, indicate whether each project is acceptable. (Round your answers to 2 decimal places.) Acceptable? IRR Project X1 Project X2

Answer 1

Answer

Internal rate of return:

Project X1 = 21.196%

Project X2 = 10.329%

Both the projects are accepted as the Internal rate of return of both the projects are higher than the required rate of return.

Explanation

E11 x v fx Project X1 Project X2 S(116,000) $(192,000) nm + ON 0 Initial investment Expected cash flow Year 1 Year 2 Year 3 43,000 53,500 78,500 87,000 77,000 67.000

Internal Rate of Return is computed using the excel equation as follows:

Internal rate of return = IRR (Values, Guess)

Project X1 IRR is computed as follows:

RATE = IRR (C4:C8, 1)

= 21.196%

hence, IRR is 21.196%

Investment rule of IRR states that the investment is accepted if the IRR of the investment is higher than its Cost of capital or vice-versa.

Therefore, Project X1 is accepted because the IRR is greater than the required rate of return of the company.

Project X2 IRR is computed as follows:

RATE = IRR (D4:D8 1)

= 10.329%

hence, IRR is 10.329%

Therefore, Project X2 is accepted because the IRR is greater than the required rate of return of the company.