Question

Salarian Company is considering two capital expenditures. Relevant data for the projects are as follows: Project A B Initial investment $202,575 $251,438 Annual income $43,820 $43,660 Life of project 6 years 9 years Salvage value $0 $0 Salarian Company uses the straight-line method to depreciate its assets.

(a) Calculate the internal rate of return for each project. (For calculation purposes, use 4 decimal places as displayed in the factor table provided, e.g. 1.2512. Round answers to 0 decimal places, e.g. 15%.) Click here to view PV table. Internal rate of return Project A % Project B % By accessing this Question Assistance, you will learn while you earn points based on the Point Potential Policy set by your instructor.

Answer 1

Correct Answer:

	IRR
Project A	8%
Project B	10%

Working:

IRR = R1+( NPV1/(NPV1-NPV2) * (R2-R1)

Project A
Year	Cash Inflows	PVA factor at 5%	Present value
1-6	$ 43,820	$ 5.0757	$     2,22,417
(-) Initial Cost			$     2,02,575
Net Present Value (NPV1) @ 5%			$        19,842

Project A
Year	Cash Inflows	PVA factor at 10.%	Present value
1-6	$ 43,820	$ 4.3553	$ 1,90,849.25
Total			$ 1,90,849.25
(-) Initial Cost			$ 2,02,575.00
Net Present Value (NPV2) @ 10%			$ (11,725.75)

Project A
NPV1	$     19,842.17
NPV2	$   (11,725.75)
NPV1-NPV2	$     31,567.93
NPV1/(NPV1-NPV2)	$                0.63
R1	5.0%
R2	10.0%
R2-R1	5.0%
IRR	8%

Project B
Year	Cash Inflows	PVA factor at 5%	Present value
1-9	$ 43,660	$ 7.1078	$     3,10,327
Total			$     3,10,327
(-) Initial Cost			$     2,51,438
Net Present Value (NPV1) @ 5%			$ 58,889.49

Project B
Year	Cash Inflows	PVA factor at 10%	Present value
1-9	$ 43,660	$ 5.7590	$ 2,51,437.94
Total			$ 2,51,437.94
(-) Initial Cost			$ 2,51,438.00
Net Present Value (NPV2) @ 10%			$               0.06

Project Beta
NPV1	$     58,888.55
NPV2	$              (0.06)
NPV1-NPV2	58,888.61
NPV1/(NPV1-NPV2)	$         1.00000
R1	5%
R2	10%
R2-R1	5%
IRR	10%

End of Answer.

Thanks