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Concept explainers
To calculate: The IRR of the better project.
Introduction:
It is a method under capital budgeting which includes the calculation of net present value of the project in which a company is investing. The calculation is done by calculating the difference between the value of
It refers to the rate of return that is computed by the company to make a decision regarding the selection of a project for investment. This rate provides the basis for selection of projects with lower cost of capital and rejection of project with higher cost of capital.
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Chapter 11 Solutions
Bundle: Fundamentals Of Financial Management, 15th + Mindtap Finance, 2 Terms (12 Months) Printed Access Card
- Project X Initial investment (CF) $500,000 Year (1) 1 2 3 4 5 Project Y $330,000 Cash inflows (CFt) $130,000 $120,000 $130,000 $200,000 $240,000 $150,000 $130,000 $75,000 $80,000 $60,000arrow_forwardIRR-Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table: 9. The firm's cost of capital is 14%. a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRS. b. Which project is preferred? a. The internal rate of return (IRR) of project X is %. (Round to two decimal places.) Data Table Is project X acceptable on the basis of IRR? (Select the best answer below.) No (Click on the icon located on the top-right corner of the data table below in order to Yes copy its contents into a spreadsheet.) Project X Initial investment (CF) $500,000 Project Y $300.000 The internal rate of return (IRR) of project Y is %. (Round to two decimal places.) Is project Y acceptable on the basis of IRR? (Select the best answer below.) Year (f) Cash inflows (CF,) 1 $110,000…arrow_forwardConsider the cash flows for the investment projects given in Table. Assume that the MARR = 10%. (a) Suppose A, B, and C are mutually exclusive projects. Which project would be selected on the basis of the IRR criterion (b) Assume that projects C and È are mutually exclusive. Using the IRR criterion, which Project would you select? Net Cash Flow A В C D E -4,250 3,200 2,850 -4,250 1,500 3,250 1,600 1,200 -4,250 2,850 -4,850 2,100 2,100 2,100 2,100 2,500 1 -835 2,900 1,050 500 2 -835 3 800 -835 4 300 -835arrow_forward
- IRR-Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table: E The firm's cost of capital is 15%. a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRS. b. Which project is preferred? a. The internal rate of return (IRR) of project X is %. (Round to two decimal places.) Is project X acceptable on the basis of IRR? (Select the best answer below.) Yes No The internal rate of return (IRR) of project Y is %. (Round to two decimal places.) Is project Y acceptable on the basis of IRR? (Select the best answer below.) Yes 6 Data Table No b. Which project is preferred? (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) O A. Project Y Project X $500,000 Project Y $290,000 B. Neither…arrow_forwardA Company is considering two mutually exclusive projects whose expected net cash flows are in the table below. The company's WACC is 15%. What is the NPV for Project Y? What is the NPV for Project Z? What is the IRR for Project Y? What is the IRR for Project Z? Which Project, if any, should you choose? Time Project Y Project Z 0 S (420.00) S(950.00) 1 S(572.00) $270.00 2 S(189.00) S270.00 3 S(130.00) $270.00 4 $1,300.00 $270.00 5 $720.00 $270.00 6 $980.00 $270.00 7 $(225.00) $270.00 Pleaseshow in excel I think im getting the wrong valuesarrow_forwardIRR-Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table: The firm's cost of capital is 13%. a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs. b. Which project is preferred? a. The internal rate of return (IRR) of project X is%. (Round to two decimal places.)arrow_forward
- Consider the following projects: Cash Flows ($) Project D E CO00 C101 -11,700 23,400 -21,700 37,975 Assume that the projects are mutually exclusive and that the opportunity cost of capital is 12%. a. Calculate the profitability index for each project. b-1. Calculate the profitability-index using the incremental cash flows. b-2. Which project should you choose?arrow_forwardConsider the following projects: Cash Flows ($) Co Project D E -11, 100 -21, 100 C₁ 22, 200 34,500 Assume that the projects are mutually exclusive and that the opportunity cost of capital is 11%. a. Calculate the profitability index for each project. b-1. Calculate the profitability-index using the incremental cash flows. b-2. Which project should you choose?arrow_forwardA Company is considering two mutually exclusive projects whose expected net cash flows are in the table below. The company's WACC is 15%. What is the NPV for Project Y? What is the NPV for Project Z? What is the IRR for Project Y? What is the IRR for Project Z? Which Project, if any, should you choose? Time Project Y Project Z 0 $(420.00) $(950.00) | $(572.00) $270.00 2 $(189.00) $270.00 3 $(130.00) $270.00 4 $1,300.00 $ 270.00 5 $720.00 $270.00 6 $980.00 $270.00 7 $(225.00) $270.00 Please show in excel I think im getting the wrong valuesarrow_forward
- A company is analyzing two mutually exclusive projects, S and L, with the following cash flows: 0 Project S Project L 1 % 2 3 -$1,000 $886.11 $260 $10 $5 $380 -$1,000 $10 $260 $805.42 The company's WACC is 10.5%. What is the IRR of the better project? (Hint: The better project may or may not be the one with the higher IRR.) Round your answer to two decimal places. 4arrow_forwardNPV Your division is considering two projects with the following cash flows (in millions): a. What are the projects’ NPVs assuming the WACC is 5%? 10%? 15%?b. What are the projects’ IRRs at each of these WACCs?c. If the WACC was 5% and A and B were mutually exclusive, which project would you choose? What if the WACC was 10%? 15%? (Hint: The crossover rate is 7.81%.)arrow_forwardMIRR and NPV Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below: Year Y -$5,000 -$5,000 1 1,000 4,500 2 1,500 1,500 2,000 1,000 4 4,000 500 The projects are equally risky, and their cost of capital is 15%. You must make a recommendation, and you must base it on the modified IRR (MIRR). Calculate the two projects' MIRRS. Do not round intermediate calculations. Round your answers to two decimal places. Project X: % Project Y: % Which project has the higher MIRR? -Select- v has the higher MIRR.arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
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