Question

Garage, Inc., has identified the following two mutually exclusive projects:

   

Year	Cash Flow (A)				Cash Flow (B)
0	–$	29,100			–$	29,100
1		14,500				4,350
2		12,400				9,850
3		9,250				15,300
4		5,150				16,900

  

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

  

	IRR
Project A	%
Project B	%

  

a-2	Using the IRR decision rule, which project should the company accept?
	Project A Project B

a-3	Is this decision necessarily correct?
	Yes No

b-1	If the required return is 12 percent, what is the NPV for each of these projects? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

	NPV
Project A	$
Project B	$

b-2	Which project will the company choose if it applies the NPV decision rule?
	Project A Project B

  

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

  

Discount rate

%

Answer 1

a-1)

		A	B
	Year	Cash Flow (A)	Cash Flow B
1	0	-29,100	-29,100
2	1	14,500	4,350
3	2	12,400	9,850
4	3	9,250	15,300
5	4	5,150	16,900
	IRR	18.79%	17.55%
	Using Excel Funaction	IRR(A1:A6)	IRR(B1:B6)

a-2) Based on IRR project A should be selcted beacuse IRR A is greater than IRR B

a-3) This decision is not necessarily correct beacuse investing cash flows at higher IRR is difficult to attain, NPv is better indicator than IRR. IRR is a good indicator when cost of capital is given

b-1)

		A	B
	Year	Cash Flow (A)	Cash Flow B
1	0	-29,100	-29,100
2	1	14,500	4,350
3	2	12,400	9,850
4	3	9,250	15,300
5	4	5,150	16,900
	Cost of Capital	0.12	0.12
	NPV	3,588.52	4,266.78
	Using Excel Function	NPV(A6,A2:A5)+A1	NPV(B6,B2:B5)+B1

b-2 ) Project B will be chosen as NPV of B is higher than NPV of A

c)

		A	B	C
	Year	Cash Flow (A)	Cash Flow B	Difference in cash flow
1	0	-29,100	-29,100	0
2	1	14,500	4,350	10,150
3	2	12,400	9,850	2,550
4	3	9,250	15,300	-6,050
5	4	5,150	16,900	-11,750
			IRR	14.75%	IRR(C1:C5)
	USING IRR on Incremental cash gives cross over rate (uindifferent between projects

Best of Luck. God Bless