Due to a restricted capital budget, a company can undertake only one of the following three-year projects.

Question:

Due to a restricted capital budget, a company can undertake only one of the following three-year projects. Both require an initial investment of $650,000 and will have no significant terminal value. Project X is anticipated to have annual profits of $400,000, $300,000, and $200,000 in successive years, whereas Project Y’s only profit, $1.05 million, comes at the end of Year 3.
a. Calculate the IRR of each project. On the basis of their IRRs, which project should be selected?
b. Which project should be selected if the firm’s is 14%?
c. Which project should be selected if the firm’s is 11%?
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...