# Garage, Inc., has identified the following two mutually exclusive projects: YearCash Flow (A)Cash Flow (B)0-\$43,500-\$43,500121,4006,400218,50014,700313,80022,80047,60025,200 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?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?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.

Question
659 views

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

 Year Cash Flow (A) Cash Flow (B) 0 -\$43,500 -\$43,500 1 21,400 6,400 2 18,500 14,700 3 13,800 22,800 4 7,600 25,200

1. 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?
2. 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?
3. 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.

check_circle

Step 1

Note:

We shall answer the first question since the exact one wasn’t specified. Please submit a new question specifying the one you’d like to get answered.

Step 2

Internal rate of return (IRR) is the discount rate at which present value of cash inflow is equal to the cash outflow. For calculating the value of IRR of projects A and B, first we are calculating present value of cash inflow of both projects at two different discounting rate.

Step 3

Calculating the internal rate of return of project A. We have,

IRR = r – [( PVCO – PVCI ) / (PV10% - PV20%)] X Difference in discounting rate

Here,

r = 20%

PVCO = Present value of cash outflow = \$ 43,500

PVCI = Present value of cash inflow at 20% = \$ 42,332

PV10% = \$ 50,303

PV20% = \$ 42,332

By substituting these value in the above formul...

### Want to see the full answer?

See Solution

#### Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in 