Question

IRRlong dash—Mutually

exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table:

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. The firm's cost of capital is

1313 %.

a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs.

b. Which project is preferred?

	Project X		Project Y
Initial investment ​(CF 0CF0​)	​$500 comma 000500,000		​$320 comma 000320,000
Year ​(t​)	Cash inflows ​(CF Subscript tCFt​)
1	​$120 comma 000120,000		​$130 comma 000130,000
2	​$120 comma 000120,000		​$120 comma 000120,000
3	​$150 comma 000150,000		​$95 comma 00095,000
4	​$190 comma 000190,000		​$90 comma 00090,000
5	​$230 comma 000230,000		​$60 comma 00060,000

Answer 1

a.Project X

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$500,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 16.24%.

Project X is acceptable since its internal rate of return is higher than the cost of capital.

Project Y

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$320,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 19.06%.

Project Y is acceptable since its internal rate of return is higher than the cost of capital.

b.Project Y is preferable since it has the highest internal rate of return.

In case of any query, kindly comment on the solution.