Quantitative Problem: Bellinger Industries is considering two projects for inclu

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-yeer lives, end they have risk characteristics similar to the firm's average project Belinger's WACC is 8%. 385 290 Project 8 105020 320 44780 What is Project A's IRR? Do not round intermediate caloulstions. Round your answer to two decimal places What is Project B's IRR? Do not round intermediate calculations. Round your answer to two decimal places

Explanation / Answer

Let irr be x%
At irr,present value of inflows=present value of outflows.

A:

1050=610/1.0x+385/1.0x^2+290/1.0x^3+330/1.0x^4

Hence x=IRR=23.03%(Approx)

B:

1050=210/1.0x+320/1.0x^2+440/1.0x^3+780/1.0x^4

Hence x=IRR=19.10%(Approx)

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