Question

In: Finance

Consider the following cash flows for two mutually exclusive investments : t=0 t=1 t=2 t=3 A...

Consider the following cash flows for two mutually exclusive investments :

t=0

t=1

t=2

t=3

A

($1,212)

$898

$543

$111

B

($911)

$101

$234

$1,033

Given the cost of capital is 8% what is the internal rate of return of the better project?

Solutions

Expert Solution

Project A

Internal rate of return can be calculated using a financial calculator by inputting the below:

  • Press the CF button.
  • CF0= -$1,212. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
  • Cash flow for each of the fifteen years should be entered.
  • Press Enter and down arrow after inputting each cash flow.
  • After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 18.45%.

Project B

Internal rate of return can be calculated using a financial calculator by inputting the below:

  • Press the CF button.
  • CF0= -$911. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
  • Cash flow for each of the fifteen years should be entered.
  • Press Enter and down arrow after inputting each cash flow.
  • After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 16.57%.

Thus, the internal rate of return of the better project is 18.45%.


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