Quantitative Problem: Bellinger Industries is considering two projects for inclu
ID: 2795942 • 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 11%. CI Project A-1,300 800375 Project B 1,300 400 295 445 305 755 310 What is Project A's IRR? Do not round intermediate calculations. Round your answer to two decimal places. s. What is Project B's IRR? Do not round intermediate calculations. Round your answer to two decimal places. If the projects were independent, which project(s) would be accepted according to the IRR method? Select If the projects were mutually exclusive, which project(s) would be accepted according to the IRR method? -Select Could there be a conflict with project acceptance between the NPV and IRR approaches when projects are mutually exclusive? -Select-Explanation / Answer
IRR is the rate at which NPV = 0
NPV is calculated by discounting the cashflows
PV = C/(1+r)^n
C - Cashflow
r - Discount rate
n - years to the cashflow
Project A:
NPV = -1300 + 800/(1+r)^1 + 375/(1+r)^2 + 295/(1+r)^3 + 305/(1+r)^4 = 0
By trail and error, r = 17.22%
Project B:
NPV = -1300 + 400/(1+r)^1 + 310/(1+r)^2 + 445/(1+r)^3 + 755/(1+r)^4 = 0
By trail and error, r = 15.22%
- If the projects were independent both the projects can be accepted as IRR is greater than WACC.
- If projects were mutually exclusive project A should be accepted as IRR is greater than project B.
- The NPV and IRR approaches use different reinvestment rate assumptions so there can be a conflict.