Question

Heurich, LLC, has identified the following two mutually exclusive projects:

Year	Cash Flow (A)				Cash Flow (B)
0		?$	90,000			?$	90,000
1			42,000				22,000
2			33,000				30,000
3			26,000				35,000
4			21,000				43,000

Requirement 1:
(a)	What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

	Internal rate of return
Project A	%
Project B	%

(b)	If you apply the IRR decision rule, which project should the company accept?
	(Click to select)Project AProject B

Requirement 2:
(a)	Assume the required return is 8 percent. What is the NPV for each of these projects? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	Net present value
Project A	$
Project B	$

(b)	Which project will you choose if you apply the NPV decision rule?
	(Click to select)Project BProject A

Requirement 3:
(a)	Over what range of discount rates would you choose Project A? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Project A

(Click to select)AboveBelow

@  %

(b)	Over what range of discount rates would you choose Project B? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g.,32.16).)

Project B

(Click to select)BelowAbove

@  %

(c)	At what discount rate would you be indifferent between these two projects? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Discount rate

%

Answer 1

Requirement A -

	Project A
Year	Cash Flow	PVF@ 15%	PV	PVF@20%	PV
0	-90000	1	-90000	1	-90000
1	42000	0.870	36521.74	0.833	35000
2	33000	0.756	24952.74	0.694	22916.67
3	26000	0.658	17095.42	0.579	15046.30
4	21000	0.572	12006.82	0.482	10127.31
	NPV		576.7204		-6909.72
	IRR	=	15 + (576.72/7486.44)*5			=	15.385177

	Project B
Year	Cash Flow	PVF@ 10%	PV	PVF@15%	PV
0	-90000	1	-90000	1	-90000
1	22000	0.909	20000	0.870	19130.43
2	30000	0.826	24793.39	0.756	22684.31
3	35000	0.751	26296.02	0.658	23013.07
4	43000	0.683	29369.58	0.572	24585.39
	NPV		10458.99		-586.798
	IRR	=	10 + (10458.99/11045.78)*5			=	14.734

Answer (b) As per IRR Rule Company Should Accept Project A

Requirement (b)

	Project A				Project B
Year	Cash Flow	PVF@8%	PV		Cash Flow	PVF@8%	PV
0	-90000	1	-90000		-90000	1	-90000
1	42000	0.926	38888.89		22000	0.926	20370.37
2	33000	0.857	28292.18		30000	0.857	25720.16
3	26000	0.794	20639.64		35000	0.794	27784.13
4	21000	0.735	15435.63		43000	0.735	31606.28
	NPV		13256.34				15480.95
	As per NPV Rule Both the projects are acceptable As they both have positive NPV and mutually exclusive

Requirement (3)

(A). The Project A should be Choosen over the discount Rate of 15.385%

(B). The Project B should be Choosen over the discount Rate of 14.734%

(C) The discount Rate at which both these projects are indiffrent Are 12.29%(approx)

	Project A				Project B
Year	Cash Flow	[email protected]%	PV		Cash Flow	[email protected]%	PV
0	-90000	1	-90000		-90000	1	-90000
1	42000	0.891	37402.82		22000	0.891	19591.95
2	33000	0.793	26171.22		30000	0.793	23792.02
3	26000	0.706	18362.78		35000	0.706	24719.13
4	21000	0.629	13208.07		43000	0.629	27045.1
	NPV		5144.901				5148.21