Please explain and show all work including equations Calculate the IRR for the f
ID: 2711353 • Letter: P
Question
Please explain and show all work including equations
Calculate the IRR for the following two projects. Which of the two projects is preferable based on the IRR? Under what conditions is it acceptable to use the IRR? Under what conditions should caution be used when implementing the IRR?
0
1
2
3
4
CF Project 1
-$98,024
$43,423
$35,674
$23,456
$18,316
CF Project 2
-$79,315
$26,000
$26,000
$26,000
$26,000
0
1
2
3
4
CF Project 1
-$98,024
$43,423
$35,674
$23,456
$18,316
CF Project 2
-$79,315
$26,000
$26,000
$26,000
$26,000
Explanation / Answer
Enter the cash flows in the excel as follows
IRR can be calculated using the formula below
Project 1 = IRR(B2:B6) = 10.59%
Project 2 = IRR(C2:C6) = 11.79%
Since Project 2 is giving greater returns, one should prefer Project 2.
IRR can be used to make capital budgeting decisions when cash flows are at the regular intervals
When there are more than 1 negative cash flows, and when positive and negative cash flows are happening alternately, then IRR has to be used with caution.
Year Project 1 Project 2 0 (98,024) (79,315) 1 43,423 26,000 2 35,674 26,000 3 23,456 26,000 4 18,316 26,000