Question

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

Year	Cash Flow (A)	Cash Flow (B)
0	?$43,500	?$43,500
1	21,400	6,400
2	18,500	14,700
3	13,800	22,800
4	7,600	25,200

What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct?

If the required return is 11 percent, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule?

Answer 1

Project A:

Discount rate	11.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(43,500.00)	0	(43,500.00)	(43,500.00)
21,400.000	1	19,279.28	(24,220.72)
18,500.000	2	15,015.02	(9,205.71)
13,800.000	3	10,090.44	884.74
7,600.000	4	5,006.36	5,891.09

IRR = 18.33%

NPV = 5,891.09

Project B:

Discount rate	11.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(43,500.00)	0	(43,500.00)	(43,500.00)
6,400.000	1	5,765.77	(37,734.23)
14,700.000	2	11,930.85	(25,803.38)
22,800.000	3	16,671.16	(9,132.22)
25,200.000	4	16,600.02	7,467.80

IRR = 17.37%

NPV = 7,467.80

Based on IRR choose A

Based on NPV choose B