Question

Here are the cash flows for two mutually exclusive projects:

Project

C0

C1

C2

C3

A

−$

22,200

+$

9,768

+$

9,768

+$

9,768

B

−

22,200

0

0

+

29,970

What is the IRR of each project? (Round your answers to 2 decimal places.)

Answer 1

IRR is that discount rate for which NPV is 0. It has to be arrived at by trial and error
by varying the discount rate suitabley to get 0 NPV.
Project A:
For NPV = 0, we have
-22200+9768*PVIFA(IRR,3) = 0
Solving for IRR, we have
PVIFA(IRR,3) = 22200/9768 = 2.2727
The interest factor for n = 3 and r = 15% = 2.2832
The interest factor for n = 3 and r = 16% = 2.2459
IRR of Project A = 15%+1%*(2.2832-2.2727)/(2.2832-2.2459) =	15.28%
Project B:
For NPV = 0, we have
-22200+29970/(1+IRR)^3 = 0
Solving for IRR, we have
22200 = 29970/(1+IRR)^3
(1+IRR)^3 = 29970/22200
IRR of Project B = (29970/22200)^(1/3)-1 =	10.52%