Solve IRR and part a, b, c Given the potential for more visitors, the town of Hi

Question

Solve IRR and part a, b, c

Given the potential for more visitors, the town of Highland Falls is evaluating four mutually exclusive projects. Given the following net cash flows, use IRR in conjunction with Incremental Analysis to identify the best project. The MARR is 8%, compounded annually. Solve for the Internal Rate of Return for Project A. Write down the equation you would use to solve for the Internal Rate of Return for Project B. Do not solve! Based on the Internal Rates of Return, which projects would you continue to consider?

Explanation / Answer

IRR of project A

Part b)

The calculation of IRR is a bit complex than other capital budgeting techniques. We know that at IRR, Net Present Value (NPV) is zero, thus:

NPV = 0; or

PV of future cash flows Initial Investment = 0; or

Where,
   r is the internal rate of return;
   CF1 is the period one net cash inflow;
   CF2 is the period two net cash inflow,
   CF3 is the period three net cash inflow, and so on ...

= 16500/(1+8%)^1 + 29,000/(1+8%)^2 + 31,500/(1+8%)^3 - 65000 = 0

Part C)

Project D should be accepted because it has the highest IRR which is 8.14%

Year Project A 0 -105300 1 0 2 0 3 133020 IRR 8.10%

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