Question

Consider the following cash flows for two mutually exclusive investments: t=0 t=1 t=2 t=3 A ($1,312) $898 $543 $111 B ($1,033) $101 $234 $1,033 Given the cost of capital is 8% what is the internal rate of return of the better project 11.13% 15.51% 12.10% 9.03% 18.45%

Answer 1

A) 11.13%

Explanation: We will choose the better project on the basis of the NPV. The project having higher Npv will be chosen.

Project A

Using financial calculator to calculate Npv

Inputs: C0= -1,312

C1= 898. Frequency= 1

C2= 543,. Frequency= 1

C3= 111. Frequency= 1

I = 8%

Npv= compute

We get, Npv of project A as $73.13

Project B

Using financial calculator to calculate Npv

Inputs: C0= -1,033

C1= 101. Frequency= 1

C2= 234. Frequency= 1

C3= 1,033. Frequency= 1

I= 8%

Npv= compute

We get, Npv of the project as $81.165

As the Npv of the project B is higher , we should calculate the IRR of Project B.

IRR of Project B

Using financial calculator to calculate IRR

Inputs: C0= -1,033

C1= 101. Frequency= 1

C2= 234. Frequency= 1

C3= 1,033. Frequency= 1

Irr= compute

We get, IRR of the project as 11.13%