Project 1 involves an outlay of $2.5m and gets an annual netincome of $1m for...

Project 1 involves an outlay of $2.5m and gets an annual net income of $1m for 5 years. Project 2 involves an outlay of $10m but gets no income until year 5. year project 1 project 2 0 -2.5 -10 1 1 0 2 1 0 3 1 0 4 1 0 5 1 15 . Use the payback method to decide which is the most attractive project. What is the accounting rate of return for project 1? Write your answer as a percent using the percent symbol. . What is the accounting rate of return for project 2? Write your answer as a percent using the percent symbol. Decide which is the most attractive project using the accounting rate of return method.

Expert Solution

Simple IRR calculations done in excel to find the answer.

Formulates in the IRR cells are shown below

As we can see from above that the P1 has the IRR (internal rate of return) of 28.65% while P2 has only 2.09% Rate of return which makes Project 1 much better than Project 2

Attractive project using the accounting rate of return method is Project 1

The accounting rate of return for project 2 is 3.09%

Now you can use this formula in excel to calculate IRR for any project. The first value is -ve as it indicates the outflow.

orchestra answered 2 years ago

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