Question

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?

Answer 1

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.

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