Quantitative Problem: Bellinger Industries is considering two projects for inclu
ID: 2713284 • Letter: Q
Question
Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%.
a.) What is Project A’s IRR? Round your answer to two decimal places.
b.)What is Project B's IRR? Round your answer to two decimal places.
years: 0 1 2 3 4 Projects A : 1,300 640 310 280 400 Projects B : 1,300 240 245 430 850Explanation / Answer
Project A Year 0 1 2 3 4 Cash Flows -1300 640 310 280 400 Let r is the rate of return which makes NPV = 0 which can be calculated by trial and error method Let r = 10% Discount factor =(1/(1+r)^year) 1 0.909091 0.826446 0.751315 0.683013 Discounted flows = cash flow * Disc Factor -1300 581.8182 256.1983 210.3681 273.2054 Net Present Value (= sum of all cash flows) 21.59006 Let r = 11% Discount factor =(1/(1+r)^year) 1 0.900901 0.811622 0.731191 0.658731 Discounted flows = cash flow * Disc Factor -1300 576.5766 251.603 204.7336 263.4924 Net Present Value -3.59449 IRR = = 0.10 + ((21.59006) * (0.10-0.11))/(-3.59449-21.59006) 0.108573 or 10.86% Project B Year 0 1 2 3 4 Cash Flows -1300 240 245 430 850 Let r is the rate of return which makes NPV = 0 which can be calculated by trial and error method Let r = 10% Discount factor =(1/(1+r)^year) 1 0.909091 0.826446 0.751315 0.683013 Discounted flows = cash flow * Disc Factor -1300 218.1818 202.4793 323.0654 580.5614 Net Present Value (= sum of all cash flows) 24.28796 Let r = 11% Discount factor =(1/(1+r)^year) 1 0.900901 0.811622 0.731191 0.658731 Discounted flows = cash flow * Disc Factor -1300 216.2162 198.8475 314.4123 559.9213 Net Present Value -10.6027 IRR = = 0.10 + ((24.28796) * (0.10-0.11))/(-10.6027-24.28796) 0.106961 or 10.70%