Question

X Blueprint Problems Ch 11 Brigham 0 Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 12%. 1 23 Project A Project B 1,150 1,150 650 250 320 255 270 420 390 840 What is Project A's IRR? Do not round intermediate calculations. Round your answer to two decimal places. What is Project B'S IRR? Do not round Intermediate calculations. Round your answer to two decimal places. If the projects were independent, which project(s) would be accepted according to the IRR method? If the projects were mutually exclusive, which project(s) would be accepted according to the IRR method? Select Could there be a conflict with project acceptance between the NPV and IRR approaches when projects are mutually exclusive? Select

Answer 1

Project A

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$1,150. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 17.80%.

Project B

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$1,150. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 15.58%.

If the projects were independent, both the projects would be accepted according to the IRR method since the internal rate of return of the projects is higher than the cost of capital.

If the projects were mutually exclusive, Project A would be accepted since it has a higher internal rate of return.

Yes, there could be a conflict with project acceptance between NPV and IRR when projects are mutually exclusive.

The reason is the NPV and IRR approaches use different reinvestment rate assumptions so there can be a conflict in project acceptance when mutually exclusive projects are considered.

Reinvestment at WACC is the superior assumption, so when mutually exclusive projects are evaluated the NPV approach should be used for the capital budgeting decision.

In case of any query, kindly comment on the solution.