Question

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

  

Year	Cash Flow (A)	Cash Flow (B)
0	–$36,200	–$36,200
1	18,700	6,300
2	14,200	12,800
3	11,700	19,300
4	8,700	23,300

  

a. What is the IRR for Project A?

  

b. What is the IRR for Project B?

  

c. If the required return is 10 percent, what is the NPV for Project A?

  

d. If the required return is 10 percent, what is the NPV for Project B?

  

e. At what discount rate would the company be indifferent between these two projects?

Answer 1

Answer a:
The cash flows for project A:
Year 0:-36200
Year 1:18700
Year 2:14200
Year 3:11700
Year 4:8700
We can determine the IRR using excel.

So, the value of IRR=20.35%

Answer b:
The cash flows for project A:
Year 0:-36200
Year 1:6300
Year 2:12800
Year 3:19300
Year 4:23300
We can determine the IRR using excel.

So, the value of IRR=20.41%

Answer c:

NPV of the project A=$7268.14 (Rounded to two decimal places)

Answer d:

NPV of the project B=$10520.37 (Rounded to two decimal places)

Answer e:
We need to subtract cash flows of project B from cash flows of project A and then calculate the IRR.
Year 0: -36200-(-36200)=0
Year 1:18700-6300=12400
Year 2:14200-12800=1400
Year 3:11700-19300=-7600
Year 4:8700-23300=-14600
Now, we need to take IRR of (0,12400,1400,-7600,-14600)
We can determine the IRR using excel.

At a discount rate of 20.56%, the company would be indifferent between the two projects.