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 11%.

a. What is Project Delta's IRR? Round your answer to two decimal places.

Explanation / Answer

Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment.

SO IRR FOR PROJECT A IS 17%

OUTFLOW IS -1200 AT YEAR 0

YEAR 1 INLFOWS= 600 AND NPV IS 600*1/1.17 = 512.82

YEAR 2 INFLOWS = 450 AND NPV IS 450*1/1.17*1.17=328.73

YEAR 3 INFLOWS= 330 AND NPV IS 330*1/1.17*1.17*1.17=199.423

YEAR 4 INFLOWS = 300 AND NPV IS 300*1/1.17*1.17*1.17*1.17= 160.095

TOTAL OF ALL NPVs = 1200

SO PROJECT IRR IS 17%

NOW PROJECT 2 IRR IS 18%

WE CAN CROSS CHECK IT IN THE SAME WAY AS DONE FOR PROJECT A

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.