Bell Manufacturing is attempting to choose the better of two mutually exclusive

Question

Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table:

Initial investment,"$500,000","$330,000"
Year,,
1,"$110,000","$160,000"
2,"$150,000","$120,000"
3,"$170,000","$85,000"
4,"$210,000","$80,000"
5,"$260,000","$60,000"

The firm's cost of capital is 14%.

a.Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs.

b.Which project is preferred?

Explanation / Answer

a. Note: Reference cells above to pull cash flows down here Project X Project Y Initial Investment (CF0) -500,000 -330,000

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