Assume a $6,500 investment and the following cash flows for two alternatives. Ye

Question

Assume a $6,500 investment and the following cash flows for two alternatives.

Year      Investment X        Investment Y

1                $1,000                  $1,300

2                $1,800                  $2,000

3                $1,700                  $1,100

4                $2,000                  $1,500

5                 $ 600

Under the Internal Rate of Return method, which of the following would be concluded?

Investment X should be selected

Investments X and Y have the same IRR.

Neither investments have an IRR.

Investment Y should be selected.

A.

Investment X should be selected

B.

Investments X and Y have the same IRR.

C.

Neither investments have an IRR.

D.

Investment Y should be selected.

Explanation / Answer

ANSWER

IRR CALCULATION

3% + 1%/178.03 * 17.83 = 3.10 %

INVESTMENT Y IS NOT ABLE TO RECOVER THE INVESTMENT AMOUNT OF $6500

Investment X should be selected.

Statemnet showing Cash flows INVESTMENT X Particulars Time let IRR = 3% Amount PV let IRR = 4% Amount PV Cash Outflows                          -                            -   -6500 -6500 -6500 -6500 Cash inflows                     1.00 0.9709 1000 970.87 0.9615 1000 961.54 Cash inflows                     2.00 0.9426 1800 1696.67 0.9246 1800 1664.20 Cash inflows                     3.00 0.9151 1700 1555.74 0.8890 1700 1511.29 Cash inflows                     4.00 0.8885 2000 1776.97 0.8548 2000 1709.61 Cash inflows                     5.00 0.8626 600 517.57 0.8219 600 493.16 PV of cash inflows 17.83 -160.20

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