Question

10.36 Management of Blossom Automotive, a manufacturer of auto parts, is considering investing in two projects. The company typically compares project returns to a cost of funds of 17.00 percent.

Year		Project 1			Project 2
0		- $508,224			- $548,471
1		316,000			127,750
2		100,000			181,170
3		124,500			265,700
4		144,000			296,050

Compute the IRRs based on the cash flows. Which project(s) will be accepted? (Round final answer to 2 decimal places, e.g. 15.25%.)

The IRR of project 1 is % and the project should be rejectedaccepted .

The IRR of project 2 is % and the project should be rejectedaccepted .

Answer 1

IRR is the rate of return at which the present values of all the cashflows from a project are equal to zero.

Given the above information, we can calculate the desired result using the Excel sheet as follows

The Formula used in excel sheet is given below

So, we can see that the IRR of project 1 is 15.74% and that of Project 2 is 18.35%

Also the company typically compares project returns to a cost of funds of 17%

Project 1 offers IRR of 15.74% which is less than company's requirement of 17%, so project 1 is rejected.

Project 2 offers IRR of 18.35% which is more than company's requirement of 17%, so project 2 is accepted.

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