Question

Project	Initial Outlay	Y1	Y2	Y3	Y4	Y5
A	-450	50	50	50	200	150
B	-850	250	50	100	500	10

Projects are independent. No specific budget. The cost of capital is 10.9%. What project or projects should be accepted based on the IRR?

	A.	Project B
	B.	Both
	C.	Project A
	D.	Neither

Answer 1

Project A

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

• Press the CF button.
• CF0= -$450. 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 2.91%.

Project A should be rejected since the internal rate of return is lesser than the cost of capital.

Project B

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

• Press the CF button.
• CF0= -$850. 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 2.34%.

Project B should be rejected since the internal rate of return is lesser than the cost of capital.

Hence, the answer is option d.

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