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Parkallen Inc. has identified the following two mutually exclusive projects: a. What is the IRR for each

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Parkallen Inc. has identified the following two mutually exclusive projects:

Cash Flow (A) Cash Flow (B) Year -$43,000 -$43,000 23,000 7,000 13,800 17,900 3 12,400 24,000 4 26,000 9,400


a. What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct?

b. If the required return is 11 percent, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule?

c. Over what range of discount rates would the company choose Project A? Project B? At what discount rate would the companybe indifferent between  these two projects? Explain.

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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Cash Flow (A) Cash Flow (B) Year -$43,000 -$43,000 23,000 7,000 13,800 17,900 3 12,400 24,000 4 26,000 9,400

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a The IRR is the interest rate that makes the NPV of the project equal to zero The equation for the ...View the full answer


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Related Book For  answer-question
Fundamentals of Corporate Finance

Fundamentals of Corporate Finance

ISBN: 978-0071051606

8th Canadian Edition

Authors: Stephen A. Ross, Randolph W. Westerfield

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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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