Bellinger Industries is considering two projects for inclusion in its capital bu

Question

Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 10%. 0 1 2 3 4 Project A -1,100 600 380 270 340 Project B -1,100 200 315 420 790 What is Project A’s IRR? Round your answer to two decimal places. %

Explanation / Answer

Solution:

Calculation of Internal rate of return:

Project A:

Here IRR can be calculated using Either Financial calculator or Excel:

1. Financial Calculator

n Financial calculator input the following values,

Step 1 : press CF button and input initial cost which is -1,100 and press Enter button

Step 2 : press "down arrow" input the value of cash flow as 600 press Enter button

Step 3: press "down arrow" , input the frequency as one and press Enter button

Step 4: press "down arrow" input the value of cash flow as 380 press Enter button

Step 5: press "down arrow" , input the frequency as one and press Enter button

Step 6: press "down arrow" input the value of cash flow as 270 press Enter button

Step 7: press "down arrow" , input the frequency as one and press Enter button

Step 8: press "down arrow" input the value of cash flow as 340 press Enter button

Step 9: press "down arrow" , input the frequency as one and press Enter button

Step 9: press "IRR" , and then press "CPT", the IRR will be computed as 19.13.

2.

Excel

Step 1:

Insert the values of Cash flow from year 0 to 4, From Cell B1 to B5

Step 2

Insert the IRR function

" = IRR(B1:B5)"

Press enter

= 19.13%

Therefore the Internal rate of return of project A is 19.13%

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