Garage, Inc., has identified the following two mutually exclusive projects: Year
ID: 1215484 • Letter: G
Question
Garage, Inc., has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$ 28,700 –$ 28,700 1 14,100 4,150 2 12,000 9,650 3 9,050 14,900 4 4,950 16,500
a-1 What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
IRR Project A %
Project B %
a-2 Using the IRR decision rule, which project should the company accept?
Project A
Project B
a-3 Is this decision necessarily correct? Yes No
b-1 If the required return is 12 percent, what is the NPV for each of these projects? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
NPV Project A $
Project B $
b-2 Which project will the company choose if it applies the NPV decision rule?
Project A
Project B
c. At what discount rate would the company be indifferent between these two projects? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Discount rate %
Explanation / Answer
(a-1) IRR is computed using Excel built-in IRR function.
(a-2) Since project A has a higher IRR, this project should be chosen.
(a-3) No, this decision is not necessarily correct. If the IRR of chosen project falls below the company's required rate of return, accepting this project will be an incorrect decision.
(b-1) NPV is the sum of all cash inflows and outflows discounted at 12%.
(b-2) Since project B has a higher positive NPV, this project should be chosen.
Note: First 5 sub-parts are answered.
PROJECT A Year Cash flow ($) 0 -28,700 1 14,100 2 12,000 3 9,050 4 4,950 IRR = 17.85% PROJECT B Year Cash flow ($) 0 -28,700 1 4,150 2 9,650 3 14,900 4 16,500 IRR = 17.01%Related Questions
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