Question

Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%.

	0		1		2		3		4
Project A	-1,050		600		360		230		300
Project B	-1,050		300		280		350		750

What is Project Delta's IRR? Round your answer to two decimal places.

  %

Answer 1

Project A

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

• Press the CF button.
• CF0= $1,050. 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 project is 18.68%.

Project B

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

• Press the CF button.
• CF0= $1,050. 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 project is 18.22%.

Project A should be selected by the firm since it has the highest internal rate of return.

Hence, project Delta’s IRR is 18.68%.

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