Internal rate of return: Ancala Corporation management is considering investments in two new golf apparel lines for next season: golf hats and belts. Due to a funding constraint, these lines are mutually exclusive. A summary of each project’s estimated cash flows over its three-year life, as well as the IRR and NPV of each, are outlined below.

The CFO of the firm has decided to manufacture the belts; however, the CEO is questioning this decision given that the IRR is higher for manufacturing hats. Explain to the CEO why the IRRs and NPVs of the belt and hat projects disagree. Is the CFO’s decision correct?

Transcribed Image Text:

Year Golf Belts Golf Hats 0 -$1,000 -$500 1 1,000 500 2 500 300 3 500 300 NPV $697.97 $427.87 IRR 54% 61%