Question

Mary Inc. is considering mutually exclusive Projects A and B, whose cash flows are shown below. If the decision is made by choosing the project with the higher IRR, will there be any value loss due to the IRR-based decision? If there is a loss, how much value will be forgone? The WACC is assumed to be 9.5%.

WACC: Year	9.5%	0	1	2	3	4
CFA		−$2,020	$730	$730	$740	$740
CFB		−$4,100	$1,400	$1,500	$1,520	$1,530

Use a financial calculator and show all steps from the calculator used. DO NOT USE EXCEL. Thank you and show all steps

Answer 1

Project A

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$2,020. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the weighted average cost of capital of 9.5%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $333.84.

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

• Press the CF button.
• CF0= -$2,020. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year 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 project is 16.85%

Project B

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$4,100. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the weighted average cost of capital of 9.5%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $651.590.

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

• Press the CF button.
• CF0= -$4,100. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year 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 project is 16.49%.

Value loss due to the IRR-based decision= $651.59 - $333.84

                                                                                    = $317.75.

In case of any query, kindly comment on the solution