Question

Consider the two projects with following cash flows denoted by (An, n). Project X: (-12000, 0), (6000, 1), (6000, 2), (6000, 3). Project Y: (-14000, 0), (7100, 1), (7100, 2), (7100, 3). If MARR is 20%, then which one of the following statements is correct: (using two decimal places)

a) Project X is more costly one (i.e. high investment cost)

b) IRR of project Y is less than 20%

c) Incremental IRR of (Y-X) is 29.92%

d) Project X is better choice

e) Project Y can be either simple investment or borrowing cash flow.

Answer 1

MARR = 20%

The cash flow information for Project X and Project Y as provided are:

Year	Project X cash flow	Project Y cash flow
0	-12000	-14000
1	6000	7100
2	6000	7100
3	6000	7100

IRR of Project X = 23.375%

IRR of Project Y = 24.32%

The IRR of Y-X is given by:

Incremental IRR of (Y-X) = 29.92%

Project Y is a better choice.

Project Y involves high investment, that is 14000 (at Year 0) vis-a-vis 12000 for Project X (at Year 0)

Hence, the correct answer is c) Incremental IRR of (Y-X) is 29.92%