Question

You are considering two mutually exclusive projects that have been assigned the same discount rate of 10.5 percent. Project A has an initial cost of $54,500, and should produce cash inflows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial cost of $79,400, and should produce cash inflows of $0, $48,300, and $42,100, for Years 1 to 3, respectively. What is the incremental IRR?

7.83%

5.40%

−15.40%

-4.67%

13.89%

Answer 1

Incremental cash flow each year = cash flow of Project B - cash flow of Project A

Incremental IRR is the IRR of the incremental cash flows

IRR is calculated using IRR function in Excel

Incremental IRR is -15.40%