Due to a restricted capital budget, a company can undertake only one of the following three-year projects. Both require an initial investment of $650,000 and will have no significant terminal value. Project X is anticipated to have annual profits of $400,000, $300,000, and $200,000 in successive years, whereas Project Y’s only profit, $1.05 million, comes at the end of Year 3.
a. Calculate the IRR of each project. On the basis of their IRRs, which project should be selected?
b. Which project should be selected if the firm’s cost of capital is 14%?
c. Which project should be selected if the firm’s cost of capital is 11%?