Following is information on two alternative investments being considered by Tige
ID: 2528776 • Letter: F
Question
Following is information on two alternative investments being considered by Tiger Co. The company requires a 4% return from its investments.
Compute the internal rate of return for each of the projects using Excel functions. Based on internal rate of return, indicate whether each project is acceptable. (Round your answers to 2 decimal places.)
Explanation / Answer
Solution:
Internal Rate of Return is the discounting rate at which present value of cash outflow is equals to the present value of cash inflows.
In other words, at IRR Net Present Value of the project is ZERO.
IRR is calculated by trial and error method using excel
Project X1
Year
Cash Flow
PV factor @ 20.34%
PV of Cash Flow
0
($80,000)
1
-$80,000
1
25000
0.831
$20,774
2
35500
0.691
$24,514
3
60500
0.574
$34,716
Net Present Value
$4
Net present Value at 20.34% is $4 almost Zero, hence the IRR for Project X1 is 20.34%
Project X2
Year
Cash Flow
PV factor @ 12.98%
PV of Cash Flow
0
($120,000)
1
-$120,000
1
60000
0.885
$53,102
2
50000
0.783
$39,168
3
40000
0.693
$27,734
Net Present Value
$4
Net Present Value at 12.98% is $4 almost ZERO, hence the IRR is 12.98%
Project X1 = IRR 20.34%
Project X2 = IRR 12.98%
Both the projects is acceptable since the required return of company is 4% and both the project has higher IRR.
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Project X1
Year
Cash Flow
PV factor @ 20.34%
PV of Cash Flow
0
($80,000)
1
-$80,000
1
25000
0.831
$20,774
2
35500
0.691
$24,514
3
60500
0.574
$34,716
Net Present Value
$4