A company is examining two mutually exclusive projects. Project X requires an immediate investment of $100,000 and produces no profit until Year 3. Then the annual profit is $60,000 for Years 3 to 5 inclusive. Project Y requires an investment of $50,000 now and another $50,000 in one year. It is expected to generate an annual profit of $40,000 in Years 2 to 5.
a. Calculate the IRR of each project. On the basis of their IRRs, which project is preferred?
b. Which project should be selected if the firm’s cost of capital is 15%?
c. Which project should be selected if the firm’s cost of capital is 12%?