Question

Bausch Company is presented with the following two mutually exclusive projects. The required return for both projects is 20 percent.

Year	Project M	Project N
0	–$139,000	–$356,000
1	63,600	152,000
2	81,600	181,000
3	72,600	137,000
4	58,600	111,000

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?

Answer 1

a.Project M

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

• Press the CF button.
• CF0= -$139,000. 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 35.02%.

Project N

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

• Press the CF button.
• CF0= -$356,000. 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 24.51%.

b. Project M

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$139,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the required return of 20%
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 20% required return is $40,940.59.

Project N                                                                                                                              

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$356,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the required return of 20%
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 20% required return is $29,173.61.

c.The company should accept project M since it has the highest net present value.

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