Question

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

   

Year	Cash Flow (A)				Cash Flow (B)
0	–$	28,000			–$	28,000
1		13,400				3,800
2		11,300				9,300
3		8,700				14,200
4		4,600				15,800

A) What is the IRR for each of these projects?

B) Using the IRR decision rule, which project should the company accept?

C) Is this decision necessarily correct?

D) If the required return is 10 percent, what is the NPV for each of these projects?

E) Which project will the company choose if it applies the NPV decision rule?

F) At what discount rate would the company be indifferent between these two projects?

Answer 1

Solution:

I have calculated IRR and NPV in Excel and we can answer accordingly

Part A) IRR for Project A is 16.13% and IRR for project B is 16.02%

Part B ) Based on the IRR decision the company should choose project A as it has higher IRR at 16.13% as compared to 16.02% for B

Part C ) This might not be the correct decision as project B has higher NPV. Project B has an NPV of 4601 while project A has 3,199.

Part D ) Based on 10% discount rate, the NPV of project A is 3,199 while project B has 4,601.

Part E) The company should choose project B as it has higher NPV.

Part F ) We can use goal seek function to find the discount rate at which both the NPV are same.

The discount rate is 15.75% at which both the NPV are same.