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You work for an outdoor play structure manufacturing company and are trying to decide between two projects:

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You work for an outdoor play structure manufacturing company and are trying to decide between two projects:


You work for an outdoor play structure manufacturing company and


You can undertake only one project. If your cost of capital is 8%, use the incremental IRR rule to make the correctdecision.

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Year-End Cash Flows (S thousands) Project Playhouse Fort 30 80 15 39 20 52 IRR 10.4% 8.6%

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Timeline Subtract the Playhouse cash flows from the Fort 50 ...View the full answer


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Corporate Finance

Corporate Finance

ISBN: 978-0133097894

3rd edition

Authors: Jonathan Berk and Peter DeMarzo

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Related Video

The internal rate of return, or IRR, is a metric used to measure the profitability of an investment. It is the discount rate that makes the net present value of an investment equal to zero. To calculate the IRR, we need to know the investment\'s cash flows. These are the inflows and outflows of cash that will result from the investment. For example, an investment in a property might have cash outflows for the purchase price, closing costs, and any renovations, and cash inflows from rent and eventual sale of the property. The IRR is the discount rate at which the NPV of the investment is equal to zero. There are many ways to calculate IRR, from simple spreadsheet functions to more complex financial modeling software. It\'s worth noting that IRR can be a bit tricky when it comes to projects that don\'t have a consistent cash flow over time. These types of investments are known as \"irregular cash flow\" and the IRR might be misleading or not suitable to calculate. There are other metrics to evaluate these investments such as Modified Internal Rate of Return (MIRR) which is a variation of IRR and is used to get more accurate results.

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