Question

Zayas, LLC, has identified the following two mutually exclusive projects:

Year	Cash Flow (A)				Cash Flow (B)
0		−$	53,000			−$	53,000
1			29,000				16,700
2			23,000				20,700
3			17,500				25,000
4			12,600				25,700

What is the IRR for each of these projects?
If you apply the IRR decision rule, which project should the company accept?

Assume the required return is 13 percent. What is the NPV for each of these projects?

Which project will you choose if you apply the NPV decision rule?

Answer 1

Internal Rate of Return

Cash Flow A

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

• Press the CF button.
• CF0= -$53,000. 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 project is 23.82%.

Cash Flow B

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

• Press the CF button.
• CF0= -$53,000. 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 project is 21.97%.

As per the IRR rule, cash flow A should be accepted since it has the highest internal rate of return.

Net Present Value

Cash Flow A

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$53,000 It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the required return of 13%
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 13% required return is $10,532.28.

Cash Flow B

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$53,000 It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the required return of 13%
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 13% required return is $11,078.44.

As per the NPV rule, Cash flow B is chosen since it has the highest net present value.

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