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Consider the following cash flows of two mutually exclusive projects for Spartan Rubber Company. Assume the discount

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Consider the following cash flows of two mutually exclusive projects for Spartan Rubber Company. Assume the discount rate for both projects is 10 percent.

YEAR DRY PREPREG SOLVENT PREPREG -$1,800,000 -$925,000 1 690,000 430,000 1,400,000 565,000 410,000 340,000

a. Based on the payback period, which project should be taken?
b. Based on the NPV, which project should be taken?
c. Based on the IRR, which project should be taken?
d. Based on the above analysis, is incremental IRR analysis necessary? If yes, please conduct the analysis.

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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YEAR DRY PREPREG SOLVENT PREPREG -$1,800,000 -$925,000 1 690,000 430,000 1,400,000 565,000 410,000 340,000

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a The payback period is the time that it takes for the cumulative undiscounted cash inflows to equal the initial investment Dry Prepeg Cumulative cash flows Year 1 690000 690000 Cumulative cash flows ...View the full answer


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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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