Consider the two mutually exclusive investment projects A and B: Cash Flows Year 0 Year 1 Year 2 3,000 10,000 Project A -2,000 Project B -5,000 2,000 (a) Verify that (yearly) Internal Rate of Return for Projects A and B are approximately 82.2% and 41.4%. (b) Suppose the cost of capital (the interest rate that you can borrow or invest) is 10% p.a. for both projects. Which project would you choose? What is the implication for decision rule in project appraisal by using Internal Rate of Return method?

Consider the two mutually exclusive investment projects A and B: Cash Flows Year 0 Year 1 Year 2 3,000 10,000 Project A -2,000 Project B -5,000 2,000 (a) Verify that (yearly) Internal Rate of Return for Projects A and B are approximately 82.2% and 41.4%. (b) Suppose the cost of capital (the interest rate that you can borrow or invest) is 10% p.a. for both projects. Which project would you choose? What is the implication for decision rule in project appraisal by using Internal Rate of Return method?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 22E

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