Question

Epsilon company is considering investing in Project X or Project Y. Project X generates the following cash flows: year “zero” = 307 dollars (outflow); year 1 = 252 dollars (inflow); year 2 = 265 dollars (inflow); year 3 = 343 dollars (inflow); year 4 = 182 dollars (inflow). Project Y generates the following cash flows: year “zero” = 230 dollars (outflow); year 1 = 120 dollars (inflow); year 2 = 100 dollars (inflow); year 3 = 200 dollars (inflow); year 4 = 120 dollars (inflow). The MARR is 10%. Compute the External Rate of Return (ERR) of the BEST project

PLEASE INCLUDE FORMULAS AND DETAILED STEPS

Answer 1

ANSWER:

FOR FINDING THE BEST PROJECT WE WILL NEED TO FIND THE PRESENT WORTH.

PW OF PROJECT X = YEAR 0 OUTFLOW + YEAR 1 INFLOW(P/F,I,N) + YEAR 2 INFLOW(P/F,I,N) + YEAR 3 INFLOW(P/F,I,N) + YEAR 4 INFLOW(P/F,I,N)

PW OF PROJECT X = -307 +252(P/F,10%,1) + 265(P/F,10%,2) + 343(P/F,10%,3) + 182(P/F,10%,4)

PW OF PROJECT X = -307 + 252 * .9091 + 265 * .8264 + 343 * .7513 + 182 * .683

PW OF PROJECT X = -307 + 229.09 + 218.99 + 257.69 + 124.3

PW OF PROJECT X = 523.09

PW OF PROJECT Y = YEAR 0 OUTFLOW + YEAR 1 INFLOW(P/F,I,N) + YEAR 2 INFLOW(P/F,I,N) + YEAR 3 INFLOW(P/F,I,N) + YEAR 4 INFLOW(P/F,I,N)

PW OF PROJECT Y = -230 + 120(P/F,10%,1) + 100(P/F,10%,2) + 200(P/F,10%,3) + 120(P/F,10%,4)

PW OF PROJECT Y = -307 + 120 * .9091 + 100 * .8264 + 200 * .7513 + 120 * .683

PW OF PROJECT Y = -307 + 109.09 + 82.64 + 150.26 + 81.96

PW OF PROJECT Y = 116.95

SINCE THE BEST PROJECT IS PROJECT X, WE WILL FIND THE ERR OF THIS PROJECT.

IN ORDER TO FIND THE ERR , WE WILL HAVE TO EQUATE THE PW TO ZERO.

PW OF PROJECT X = -307 +252(P/F,I,1) + 265(P/F,I,2) + 343(P/F,I,3) + 182(P/F,I,4)

0 = -307 +252(P/F,I,1) + 265(P/F,I,2) + 343(P/F,I,3) + 182(P/F,I,4)

307 = 252(P/F,I,1) + 265(P/F,I,2) + 343(P/F,I,3) + 182(P/F,I,4)

BY TRIAL AND ERROR , I = 77.11%