Question

Due to a restricted capital budget, a company can undertake only one of the following three-year projects. Both require an initial investment of $650,000 and will have no significant terminal value. Project XXX is anticipated to have annual profits of $400,000, $300,000, and $200,000 in successive years, whereas Project YYY’s only profit, $1.05 million, comes at the end of Year 3. a. Calculate the IRR of each project.

Answer 1

For Project XXX:

To find the IRR, we need to put the following values in the financial calculator:

CF0 = -650,000; C01 = $400,000; F01 = 1; C02 = $300,000; F02 = 1; C03 = $200,000; F03 = 1; Press IRR, then CPT, which gives 20.82

Hence, IRR for Project XXX is 20.82%

For Project YYY:

To find the IRR, we need to put the following values in the financial calculator:

CF0 = -650,000; C01 = 0; F01 = 2; C02 = $1,050,000; F02 = 1; Press IRR, then CPT, which gives 17.33

Hence, IRR for Project XXX is 17.33%