Refer to Damon Electronics Company information below, what are the IRR of projec
ID: 2738225 • Letter: R
Question
Refer to Damon Electronics Company information below, what are the IRR of project X and the IRR of project Y? (Note: Keep your answer. There are two other related questions.)
Use the following information for the three questions referring to Damon Electronics Company:
You are a financial analyst for Damon Electronics Company. The director of capital budgeting has asked you to analyze two proposed capital investments, project X and project Y. Each project has a cost of $10,000, and the cost of capital for each project is 12%. The projects’ expected net cash flows are as follows:
Project X Project Y
Period Cash flows Cash flows
0 $10,000 $10,000
1 6,500 1,000
2 3,000 1,000
3 3,000 7,000
4 1,000 7,000
20.35%; 13.21%
18.03%; 16.61%
19.87%; 16.61%
18.03%; 15.84%
19.87%; 15.84%
A.20.35%; 13.21%
B.18.03%; 16.61%
C.19.87%; 16.61%
D.18.03%; 15.84%
E.19.87%; 15.84%
Explanation / Answer
Internal rate of return (IRR) is a metric used in capital budgeting measuring the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
Formula =
Formula =L1+NPV1/(NPV1-NPV2)*(L2-L1)
Here, L1 = First Discount rate , L2 = Second Discount rate,NPV1 = NPV at First Discount rate , NPV2 =NPV at Second Discount rate.
Computation of IRR of Project X
Computation of IRR using formula =18%+4.71/(4.71-(140.40)*(19%-18%) =18.03%
Computation of IRR of project Y
Computation of IRR using formula =15%+230.60/(230.60-(44.13)*(16%-15%) =15.84%
Computation of NPV at 18% Year Cash flows PVF@18% PV 0 -10000 1 (10,000.00) 1 6,500 0.847 5,508.47 2 3,000 0.718 2,154.55 3 3,000 0.609 1,825.89 4 1,000 0.516 515.79 NPV1 4.71 Computation of NPV at 19% Year Cash flows PVF@19% PV 0 -10000 1 (10,000.00) 1 6,500 0.840 5,462.18 2 3,000 0.706 2,118.49 3 3,000 0.593 1,780.25 4 1,000 0.499 498.67 NPV2 (140.40)