Bellinger Industries is considering two projects for inclusion in its capital bu

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 11%.

What is Project A’s IRR? Do not round intermediate calculations. Round your answer to two decimal places.

What is Project B's IRR? Do not round intermediate calculations. Round your answer to two decimal places.

0 1 2 3 4 Project A -1,250 730 360 270 315 Project B -1,250 330 295 420 765

Explanation / Answer

Let irr be x%
At irr,present value of inflows=present value of outflows.

a:

1250=730/1.0X+360/1.0X^2+270/1.0X^3+315/1.0X^4

Hence x=irr=15.70%(Approx).

b.

1250=330/1.0X+295/1.0X^2+420/1.0X^3+765/1.0X^4

Hence x=irr=14.10%(Approx).

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