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 9%.

What is Project A’s IRR? Round your answer to two decimal places.

--------%

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

------- %

0 1 2 3 4 Project A -1,000 650 320 270 390 Project B -1,000 250 255 420 840

Explanation / Answer

The formula for IRR is:

0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n

where P0, P1, . . . Pn equals the cash flows in periods 1, 2, . . . n, respectively; and
IRR equals the project's internal rate of return.

IRR can also be used to calculate expected returns on stocks or investments, including the yield tomaturity on bonds. IRR calculates the yield on an investment and is thus different than net present value (NPV) value of an investment.

IRR For Project A = 26.47%

IRR For Project B = 21.42%

Project A Project B WACC 9% Year 0 -1000 -1000 Year 1 650 250 Year 2 320 255 Year 3 270 420 Year 4 390 840 IRR 26.47% 21.42%

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