IRR: Mutually exclusive projects Ocean Pacific Restaurant is
evaluating two mutually exclusive projects for expanding the
restaurant's seating capacity. The relevant cash
flows for the projects are shown in the following table. The firm's
cost of capital is 4%.
Project X 
Project Y 

Initial Investment (CF) 
980,000 
363,000 
Year 
Cash inflows (CF) 

1 
150,000 
110,000 
2 
170,000 
98,000 
3 
220,000 
93,000 
4 
270,000 
82,000 
5 
340,000 
67,000 
a. calculate the IRR to the nearest whole percent for each of the projects.
b. assess the acceptability of each project on the basis of the IRRs found in part a.
c. which project, on this basis, is preferred?
1. Calculation of Project X IRR using financial calculator:
CF0 = 980,000; CF1 = 150,000; CF2 = 170,000; CF3 = 220,000; CF4 = 270,000; CF5 = 340,000
IRR > CPT = 4.8588% i.e 5%
Calculation of Project Y IRR using financial calculator:
CF0 = 363,000; CF1 = 110,000; CF2 = 98,000; CF3 = 93,000; CF4 = 82,000; CF5 = 67,000
IRR > CPT = 8.2906% i.e 8%
2&3. As both the projects IRR is greater than cost of capital of 4%, both the projects can be accepted. However, as the projects are mutually exclusive; and IRR of project Y is higher if compared to Project X, Project Y should be accepted
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