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IRRlMutually exclusive projects   Bell Manufacturing is attempting to choose the better of two mutually exclusive projects...

IRRlMutually

exclusive projects   Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the​ firm'swarehouse capacity. The relevant cash flows for the projects are shown in the following​ table:

Initial investment        $500,000         $320,000

Year                

1          $130,000         $130,000

2          $120,000         $120,000

3          $130,000         $105,000

4          $200,000         $90,000

5          $250,000         $40,000

The​ firm's cost of capital is 17​%.

a.  Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs.

b.  Which project is​ preferred?

Solutions

Expert Solution

Project 1

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

  • •   Press the CF button.
  • •   CF0= -$500,000. 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 17.05%

The project should be accepted since the IRR of the project is equal to the cost of capital.

Project 2

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

  • •   Press the CF button.
  • •   CF0= -$320,000. 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 18.66%

The project should be implemented since the IRR of the project is higher than the cost of capital.

b.The second project is preferred since it has the highest IRR.

In case of any query, kindly comment on the solution


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