Question

Yep Company is considering investing in Project G or Project H. Project G generates the following cash flows: year “zero” = 254 dollars (outflow); year 1 = 244 dollars (inflow); year 2 = 346 dollars (inflow). Project H generates the following cash flows: year “zero” = 200 dollars (outflow); year 1 = 180 dollars (inflow); year 2 = 100 dollars (inflow). The MARR is 10 %. Compute the Internal Rate of Return (IRR) of the BEST project.

PLEASE INCLUDE FORMULAS AND DETAILED STEPS. THANK YOU

Answer 1

ANSWER:

pw of project g =  outflow in year 0 + inflow in year 1(p/f,i,n) + inflow in year 2(p/f,i,n)

pw of project g = -254 + 244(p/f,10%,1) + 346(p/f,10%,2)

pw of project g = -254 + 244 * .9091 + 346 *.8264

pw of project g = -254 + 221.82 + 285.93

pw of project g = $253.75

pw of project h =  outflow in year 0 + inflow in year 1(p/f,i,n) + inflow in year 2(p/f,i,n)

pw of project h = -200 + 180(p/f,10%,1) + 100(p/f,10%,2)

pw of project h = -200 + 180 * .9091 + 100 *.8264

pw of project h = -200 + 163.638 + 82.64

pw of project h = $46.278

so , the best project is project g

i have found out the irr of both the projects g and h ( for your better understanding) , although the question said to find the irr of the best project.

In order to find the irr we will have to equate present worth to zero.

pw of project g = outflow in year 0 + inflow in year 1(p/f,i,n) + inflow in year 2(p/f,i,n)

0 = -254 +244(p/f,i,1)+346(p/f,i,2)

254 = 244(p/f,i,1)+346(p/f,i,2)

finding i by trial and error we get i = 74.24%

pw of project h = outflow in year 0 + inflow in year 1(p/f,i,n) + inflow in year 2(p/f,i,n)

0 = -200 +180(p/f,i,1)+ 100(p/f,i,2)

200 = 180(p/f,i,1) + 100(p/f,i,2)

finding i by trial and error we get i = 28.82%

so , the irr of the best project which is project g is 74.24%