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

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


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 company be indifferent between these two projects? Explain.

Transcribed Image Text:

Year Cash Flow (A) Cash Flow (B) -$41,300 -$41,300 1 19,100 6,300 2 17,800 14,200 3 15,200 17,900 4 8,400 30,300

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a The internal rate of return IR R for Project A is 17 and the IR R for Pro...View the full answer


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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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