Question

1. A company is analyzing two mutually exclusive projects, A and B, whose cash flows are shown below:

Years        0 r = 10%    1                   2                   3

|                    |                    |                    |

A	-3,100	1,800	1750	750
B	-3,100	700	0	3,500

The company's cost of capital is 10 percent, and it can get an unlimited amount of capital at that cost. What is the IRR of the better project, i.e., the project which the company should choose if it wants to maximize its stock price?

Project----------------                   IRR-------------------                 

Answer 1

Project A

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

• Press the CF button.
• CF0= -$3,100. 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 21.15%.

Project B

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

• Press the CF button.
• CF0= -$3,100. 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 12.23%.

Project A is the better project since it ahs the highest IRR.

Therefore, the IRR of the better project is 21.15%.

In case of any query, kindly comment on the solution.