Refer to Damon Electronics Company information below, what are the IRR of projec

Question

Refer to Damon Electronics Company information below, what are the IRR of project X and the IRR of project Y? (Note: Keep your answer. There are two other related questions.)

Use the following information for the three questions referring to Damon Electronics Company:

You are a financial analyst for Damon Electronics Company. The director of capital budgeting has asked you to analyze two proposed capital investments, project X and project Y. Each project has a cost of $10,000, and the cost of capital for each project is 12%. The projects’ expected net cash flows are as follows:

Project X Project Y

Period   Cash flows   Cash flows          

   0 $10,000 $10,000      

   1                       6,500                    1,000          

   2                       3,000                    1,000          

   3                       3,000                    7,000          

   4                       1,000                    7,000          

20.35%; 13.21%

18.03%; 16.61%

19.87%; 16.61%

18.03%; 15.84%

19.87%; 15.84%

A.

20.35%; 13.21%

B.

18.03%; 16.61%

C.

19.87%; 16.61%

D.

18.03%; 15.84%

E.

19.87%; 15.84%

Explanation / Answer

Internal rate of return (IRR) is a metric used in capital budgeting measuring the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Formula =

Formula =L1+NPV1/(NPV1-NPV2)*(L2-L1)

Here, L1 = First Discount rate , L2 = Second Discount rate,NPV1 = NPV at First Discount rate , NPV2 =NPV at Second Discount rate.

Computation of IRR of Project X

Computation of IRR using formula =18%+4.71/(4.71-(140.40)*(19%-18%) =18.03%

Computation of IRR of project Y

Computation of IRR using formula =15%+230.60/(230.60-(44.13)*(16%-15%) =15.84%

Computation of NPV at 18% Year Cash flows PVF@18% PV 0 -10000 1                    (10,000.00) 1 6,500 0.847                      5,508.47 2 3,000 0.718                      2,154.55 3 3,000 0.609                      1,825.89 4 1,000 0.516                         515.79 NPV1                             4.71 Computation of NPV at 19% Year Cash flows PVF@19% PV 0 -10000 1                    (10,000.00) 1 6,500 0.840                      5,462.18 2 3,000 0.706                      2,118.49 3 3,000 0.593                      1,780.25 4 1,000 0.499                         498.67 NPV2                        (140.40)

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