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Management of Crane Measures, Inc., is evaluating two independent projects. The company uses a 12.62 percent...

Management of Crane Measures, Inc., is evaluating two independent projects. The company uses a 12.62 percent discount rate for such projects. The costs and cash flows for the projects are shown in the following table. Year Project 1 Project 2 0 - $8,066,549 - $11,655,500 1 3,003,590 2,165,830 2 1,608,490 3,783,590 3 1,465,800 2,820,680 4 1,061,800 4,040,500 5 1,153,880 4,449,580 6 1,708,040 7 1,266,990 a. What are the IRRs for the projects? (Round final answer to 2 decimal places, e.g. 15.25%.)

The IRR of Project 1 is _____%, and the IRR of Project 2 is ______%

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Answer #1

IRR is the Rate at which PV of Cash Inflows are equal to PV of Cash Outflows.

Project 1:

Year CF PVF @10% Disc CF PVF @11% Disc CF
0 $ -80,66,549.00     1.0000 $ -80,66,549.00     1.0000 $ -80,66,549.00
1 $ 30,03,590.00     0.9091 $ 27,30,536.36     0.9009 $ 27,05,936.94
2 $ 16,08,490.00     0.8264 $ 13,29,330.58     0.8116 $ 13,05,486.57
3 $ 14,65,800.00     0.7513 $ 11,01,277.24     0.7312 $ 10,71,780.33
4 $ 10,61,800.00     0.6830 $     7,25,223.69     0.6587 $     6,99,440.55
5 $ 11,53,880.00     0.6209 $     7,16,468.70     0.5935 $     6,84,771.62
6 $ 17,08,040.00     0.5645 $     9,64,144.05     0.5346 $     9,13,187.93
7 $ 12,66,990.00     0.5132 $     6,50,166.20     0.4817 $     6,10,256.39
NPV $     1,50,597.82 $      -75,688.68

IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in disc Rate ] * 1%

= 10% + [ 150597.82 / 226286.49 ] * 1%

= 10% + 0.67%

= 10.67%

Project 2:

Year CF PVF @13% Disc CF PVF @14% Disc CF
0 $ -1,16,55,500.00     1.0000 $ -1,16,55,500.00              1.0000 $ -1,16,55,500.00
1 $      21,65,830.00     0.8850 $      19,16,663.72              0.8772 $      18,99,850.88
2 $      37,83,590.00     0.7831 $      29,63,105.96              0.7695 $      29,11,349.65
3 $      28,20,680.00     0.6931 $      19,54,872.73              0.6750 $      19,03,878.66
4 $      40,40,500.00     0.6133 $      24,78,114.32              0.5921 $      23,92,300.36
5 $      44,49,580.00     0.5428 $      24,15,053.76              0.5194 $      23,10,972.42
NPV $           72,310.48 $      -2,37,148.04

IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in disc Rate ] * 1%

= 13% + [ 72310.48 / 309458.52 ] * 1%

= 13% + 0.23%

= 13.23%

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