Question
In: Accounting
INTEL Plc is comparing two mutually exclusive projects, whose details are given below. The company’s cost of...
INTEL Plc is comparing two mutually exclusive projects, whose details are given below. The company’s cost of capital is 12 per cent
|
Year |
Project A ($'000) |
Project B ($’000) |
|
0 |
(150) |
(152) |
|
1 |
30 |
40 |
|
2 |
25 |
35 |
|
3 |
30 |
30 |
|
4 |
35 |
27 |
|
5 |
40 |
25 |
Required:
Using the internal rate of return method, which project should be accepted?
Solutions
Expert Solution
| Project A | Project B | ||||||||
| IRR | 2% | 1.2% | |||||||
| No project should be accepted | |||||||||
| 1) | Caluclate IRR of project A | ||||||||
| IRR: IRR stands for Internal rate of return, it is a rate where Net present value is zero. | |||||||||
| Steps: To Calculate IRR, we took two random discount rate where at one present value is in negative while in other in positive. Here we took 20% and 28%. | |||||||||
| Year | Cash Flows | PVF | PVF | Present Value at | Present Value at | ||||
| 10.0000% | 20% | 10% | 20% | ||||||
| 0 | (150,000) | 1.00000 | 1.000 | (150,000) | (150,000) | ||||
| 1 | 30,000 | 0.90909 | 0.83333 | 27,273 | 25,000 | ||||
| 2 | 25,000 | 0.82645 | 0.69444 | 20,661 | 17,361 | ||||
| 3 | 30,000 | 0.75131 | 0.57870 | 22,539 | 17,361 | ||||
| 4 | 35,000 | 0.68301 | 0.48225 | 23,905 | 16,879 | ||||
| 5 | 40,000 | 0.62092 | 0.40188 | 24,837 | 16,075 | ||||
| Net Present Value | (30,784) | (57,324) | |||||||
| IRR = Lower Discount Rate + [Lower Rate NPV / (Lower Rate NPV - Higher Rate NPV)] * (Higher Discount Rate - Lower Discount Rate) | |||||||||
| By putting above values in the give formula we get IRR = 2% | |||||||||
| 2) | Caluclate IRR of project B | ||||||||
| 3) | IRR: IRR stands for Internal rate of return, it is a rate where Net present value is zero. | ||||||||
| Steps: To Calculate IRR, we took two random discount rate where at one present value is in negative while in other in positive. Here we took 20% and 28%. | |||||||||
| Year | Cash Flows | PVF | PVF | Present Value at | Present Value at | ||||
| 10.0% | 20% | 10% | 20% | ||||||
| 0 | (152,000) | 1.00000 | 1.000 | (152,000) | (152,000) | ||||
| 1 | 40,000 | 0.90909 | 0.83333 | 36,364 | 33,333 | ||||
| 2 | 35,000 | 0.82645 | 0.69444 | 28,926 | 24,306 | ||||
| 3 | 30,000 | 0.75131 | 0.57870 | 22,539 | 17,361 | ||||
| 4 | 27,000 | 0.68301 | 0.48225 | 18,441 | 13,021 | ||||
| 5 | 25,000 | 0.62092 | 0.40188 | 15,523 | 10,047 | ||||
| Net Present Value | (30,207) | (53,932) | |||||||
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details are given below. The company’s cost of capital
is 12 per cent
Year
Project A ($'000)
Project B ($’000)
0
(150)
(152)
1
30
40
2
25
35
3
30
30
4
35
27
5
40
25
Required:
Using the net present value method, which project should be
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0
1
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