Homework: Module 8: Chapter 10 Save Hw Score: 32.5%, 13 of 40 pts Score: 0 of 5

Question

Homework: Module 8: Chapter 10 Save Hw Score: 32.5%, 13 of 40 pts Score: 0 of 5 pts P10-16 (similar to IRR Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse 5of8(4 complete) Question Help * capacity. The relevant cash flows for the projects are shown in the following table: " The firm's cost of capital is 15%. a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs b. Which project is preferred? a. The internal rate of return (IRR) of project X is % (Round to two decimal places.) nter your answer in the answer box and then click Check Answer Check Answer Clear All parts remaining

Explanation / Answer

Project X

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

500,000= 130,000/(1.0x) + 120,000/ (1.0x)^2  + 150,000/(1.0x)^3+170,000/(1.0x)^4+ 230,000/(1.0x)^5

Or x= 16.06%

Hence, the Irr is 16.06%

Project Y

Let the IRR be y.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

340,000 = 120,000/(1.0y) + 140,000 / (1.0y)^2  + 105,000 /(1.0y)^3 +  90,000/(1.0y)^4 +  70,000/(1.0y)^5

Or y= 18.45%

Hence the IRR is 18.45%

Since both the Projects have IRR greater than zero both the projects are acceptable.

b. Project Y has higher IRR than Project X and hence would be preferred .

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