Question

Your professor has been presented with two exciting investment opportunities. The first business, Lord Stanley's Silverworks, produces large trophies in the Tampa Bay area. The second, AllSTARS Golf, provides golf lessons to athletes in Dallas.

The trophy business requires an initial investment of $75,000 and produces cash flows of $25,000, $35,000, and $41,000 over the next three years, respectively. The golf lessons business will require a smaller investment of $25,000 and produces cash flows of $5,000, $13,000, and $18,000.

What is the IRR of the project that should be selected if interest rates are 13.28% (Hint: Draw an NPV profile)?

Answer 1

First we have to calculate NPV of both projects, the project with highest NPV should be selected. We have to calculate IRR For that project

Since NPV of Trophy business is higher it should be selected

IRR For that project = 15.12%

Formulas will be as follows: