Question

c.	At what discount rate would the company be indifferent between these two projects? Please show the work, possibly through excel if you can.

Bruin, Inc., has identified the following two mutually exclusive projects:

   

Year	Cash Flow (A)				Cash Flow (B)
0	–$	29,200			–$	29,200
1		14,600				4,400
2		12,500				9,900
3		9,300				15,400
4		5,200				17,000

Answer 1

difference between cash flow of the two projects are:

Year	Cash flow stream
0	0
1	10200
2	2600
3	-6100
4	-11800

IRR for this incremental CF will be the indifference rate

IRR is the rate at which NPV =0
IRR	14.66%
Year	0	1	2	3	4
Cash flow stream	0.000	10200.000	2600.000	-6100.000	-11800.000
Discounting factor	1.000	1.147	1.315	1.507	1.728
Discounted cash flows project	0.000	8895.803	1977.622	-4046.549	-6826.876
NPV = Sum of discounted cash flows
NPV 0 =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	14.66%