Question

Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%.

	0		1		2		3		4
Project A	-1,100		590		360		220		280
Project B	-1,100		230		300		360		700

What is Project Delta's IRR? Do not round intermediate calculations. Round your answer to two decimal places.

%

Answer 1

IRR = LOWER RATE + {NPV(L) / NPV(L)- NPV(H)} * (HIGHER RATE - LOWER RATE)

Project A

Let us assume two rates be 14% and 15%

NPV @ 14%

Year	Cash flows	PVF @ 14%	P.V.
0	-1100	1	(1,100.00)
1	590	0.87719298	517.54
2	360	0.76946753	277.01
3	220	0.67497152	148.49
4	280	0.59208028	165.78
		NPV	8.83

NPV @15%

Year	Cash flows	PVF @ 15%	P.V.
0	-1100	1	(1,100.00)
1	590	0.86956522	513.04
2	360	0.75614367	272.21
3	220	0.65751623	144.65
4	280	0.57175325	160.09
		NPV	(10.00)

IRR = 14%+ {8.83 / 8.83-(-10)} (15- 14) = 14.47%

Project B

Let us assume two rte here be 13% and 14%

NPV @ 13%

Year	Cash flows	PVF @ 13%	P.V.
0	-1100	1	(1,100.00)
1	230	0.88495575	203.54
2	300	0.78314668	234.94
3	360	0.69305016	249.50
4	700	0.61331873	429.32
		NPV	17.30

NPV @14%

Year	Cash flows	PVF @ 14%	P.V.
0	-1100	1	(1,100.00)
1	230	0.87719298	201.75
2	300	0.76946753	230.84
3	360	0.67497152	242.99
4	700	0.59208028	414.46
		NPV	(9.96)

IRR = 13%+ {17.3/17.3-(-9.96)} *(14- 13) = 13.63%