Consider that L.uxio has identified the following two mutually exclusive project
ID: 2600388 • Letter: C
Question
Consider that L.uxio has identified the following two mutually exclusive projects: Cash Flow (B) -$34,000 5,000 10,000 18,000 19,000 Year Cash Flow (A) -$34,000 16,500 14,000 10,000 6,000 a) What is the IRR for cach of these projects? Based on IRR decision rule, which projedt b) If the required return is 11%, what is the NPV for each of these projects? Based on the c) Over what range of discount rates would the company choose project A? At what should the company accept? NPV decision rule, which project should the company accept? discount rate would the company be indifferent between these two projects? Explain.Explanation / Answer
(a) IRR for project A is 16.60% and for Project B is 15.72%.
Based on the IRR decision rule Project A should be accepted by the company.
Working:
IRR is the rate of return at which the NPV or a project is zero. To arrive at this figure first we use the excel worksheet and find out the rate from the toolbar provide in the excel spread sheet. We then check the range by actually applying the NPV formula as mentioned above.
Project A:
(i) From the excel toolbar
We now check the range (16% and 17%) by calculating NPV at this two rates.
The positive NPV at 16% is becoming negative @17% we can clonclude that the IRR is between 16% and 17%.
Project B:
(i) From the excel toolbar
We now check the range (15% and 16%) by calculating NPV at this two rates.
The positive NPV at 15% is becoming negative @16% we can clonclude that the IRR is between 15% and 16%
(b)
NPV for project A is $3,492.00 anf for Project B is $4,298.00
Based on NPV project B is to be accepted.
Working:
(c)
At the rate of 13.75% the company will be indifferent between the two projects.
To find out the indifference point, we calculate the IRR for the differential cash flows between two projects. Then as we have done above we check the rate with NPV formula.
Checkig the IRR:
As we can see from the abve the NPV for both the projects is $1,703/1,704) . Therefore the indifference point is the discounting rate of 13.75%.
Years 0 1 2 3 4 Cash flows -34000 16500 14000 10000 6000 IRR 16.60%Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.