Question

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

   

Year	Cash Flow (A)				Cash Flow (B)
0	–$	29,500			–$	29,500
1		14,900				4,550
2		12,800				10,050
3		9,450				15,700
4		5,350				17,300

  

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 10 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

Project A:

Use IRR function in Excel

IRR of A = 19.69%

rate	10.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year
(29,500.00)	0	(29,500.00)
14,900.00	1	13,545.45
12,800.00	2	10,578.51
9,450.00	3	7,099.92
5,350.00	4	3,654.12

NPV of A = 5,378.01

Project B:

IRR of B = 18.07%

rate	10.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year
(29,500.00)	0	(29,500.00)
4,550.00	1	4,136.36
10,050.00	2	8,305.79
15,700.00	3	11,795.64
17,300.00	4	11,816.13

NPV of B = 6,553.92

Based on IRR choose A

Based on NPV choose B