Consider the two mutually exclusive investment projects given in the table below
ID: 1114736 • Letter: C
Question
Consider the two mutually exclusive investment projects given in the table below for which MARR=12%.
On the basis of the IRR criterion, which project would be selected under an infinite planning horizon with project repeatability likely?
The rate of return on the incremental investment is what? (Round to one decimal place.)
Net Cash Flow
n
Project A
Project B
0
$4,000
$11,000
1
1,500
9,500
2
2,000
9,500
3
2,000
—
IRR
16.88%
45.66%
Net Cash Flow
n
Project A
Project B
0
$4,000
$11,000
1
1,500
9,500
2
2,000
9,500
3
2,000
—
IRR
16.88%
45.66%
Explanation / Answer
1. Based on IRR method, Project B should be selected, as it has higher internal rate of return, making it more profitable
2. First, calculate incremental cash flow series:
(B-A)
This gives values as:
Year 0 -11000 - (-4000) = -7000
Year 1 9500 - 1500 = 8000
Year 2 9500 - 2000 = 7500
Year 3 0 - 2000 = -2000
Use formula '=IRR(-7000,8000,7500,-2000)'
This gives IRR = -176.1%