Consider the two mutually exclusive investment projects given in the table below

Question

Consider the two mutually exclusive investment projects given in the table below for which MARR=12%.

On the basis of the IRR criterion, which project would be selected under an infinite planning horizon with project repeatability likely?

The rate of return on the incremental investment is what? (Round to one decimal place.)

Net Cash Flow

n

Project A

Project B

0

$4,000

$11,000

1

1,500

9,500

2

2,000

9,500

3

2,000

—

IRR

16.88%

45.66%

Net Cash Flow

n

Project A

Project B

0

$4,000

$11,000

1

1,500

9,500

2

2,000

9,500

3

2,000

—

IRR

16.88%

45.66%

Explanation / Answer

1. Based on IRR method, Project B should be selected, as it has higher internal rate of return, making it more profitable

2. First, calculate incremental cash flow series:

(B-A)

This gives values as:

Year 0 -11000 - (-4000) = -7000

Year 1 9500 - 1500 = 8000

Year 2 9500 - 2000 = 7500

Year 3 0 - 2000 = -2000

Use formula '=IRR(-7000,8000,7500,-2000)'

This gives IRR = -176.1%

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