Question

Use the following information to answer the next three questions. 

Consider the cash flows from two mutually exclusive projects: 

Cash Flow

Year	Project A	Project B
0	-$420,000	-$420,000
1	$140,000	$400,000
2	$230,000	$110,000
3	$331,000	$140,000

The appropriate discount rate is 8.5%.

Calculate the internal rate of return (IRR) for both projects, and determine which project should be accepted based on IRR.

Answer 1

Project A

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

• Press the CF button.
• CF0= -$420,000. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
• Cash flow for each of the fifteen years 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 26.20%.

Project B

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

• Press the CF button.
• CF0= -$420,000. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
• Cash flow for each of the fifteen years 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 33.54%.

Project B should be selected since it generates the largest internal rate of return.

  

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