Question

Ontario, Inc. establishes a 5% hurdle rate for its investment projects. The firm is considering three projects: X, Y, and Z at the end of its fiscal year. Ontario, Inc. has sufficient funds to finance all of these independent projects at the beginning of the new year.

	X	Y	Z
Cost of investment	$200,000	$300,000	$250,000
Cash outflow—year 1	15,000	10,000	20,000
Cash outflow—year 2	5,000	10,000	30,000
Cash inflow—year 1	40,000	46,000	75,000
Cash inflow—year 2	40,000	50,000	73,000
Cash inflow—year 3	40,000	44,000	71,000
Cash inflow—year 4	40,000	48,000	69,000
Cash inflow—year 5	40,000	52,000	67,000
Cash inflow—year 6	40,000	56,000	65

Required: Using Excel and its appropriate formula, compute the internal rate of return for projects X, Y, and Z. State which projects Ontario should accept.

Answer 1

Project Z has the highest IRR of 11.83%. So, Project Z should be selected