Kerron Company is presented with the following two mutually exclusive projects.
ID: 2731054 • Letter: K
Question
Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 14 percent.
What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 14 percent.
Explanation / Answer
Answer to Part 1.
IRR is the rate of interest at which NPV of the project is 0.
Project M :
NPV = -144,000 + 63,100/(1+i) + 81,100/(1+i)^2 + 72,100/(1+i)^3 + 58,100/(1+i)^4
i = 32.35%
Project N :
NPV = -351,000 + 154,500/(1+i) + 176,000/(1+i)^2 + 139,500/(1+i)^3 + 106,000/(1+i)^4
i = 25.01%
Answer to Part 2.
Project M :
NPV = -144,000 + 63,100/1.14 + 81,100/1.14^2 + 72,100/1.14^3 + 58,100/1.14^4
N PV = $56,820.00
Project N :
NPV = -351,000 + 154,500/1.14 + 176,000/1.14^2 + 139,500/1.14^3 + 106,000/1.14^4
NPV = $76,871.64
Answer to Part 3.
Since, both project have IRR higher than required rate of return both projects are acceptable. But Project N has more NPV than Project M. Therefore, Project N should be accepted.
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