3. 3: The Basics of Capital Budgeting: IRR

What is Project As IRR? Do not round intermediate calculations. 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.

%

If the projects were independent, which project(s) would be accepted according to the IRR method?

Neither or Project A or Project B or Both projects A and B

If the projects were mutually exclusive, which project(s) would be accepted according to the IRR method?

Neither or Project A or Project B or Both projects A and B

Could there be a conflict with project acceptance between the NPV and IRR approaches when projects are mutually exclusive?

Yes or No

The reason is:

the NPV and IRR approaches use the same reinvestment rate assumption and so both approaches reach the same project acceptance when mutually exclusive projects are considered.

OR

the NPV and IRR approaches use different reinvestment rate assumptions and so there can be a conflict in project acceptance when mutually exclusive projects are considered.

Reinvestment at the: IRR or WACC is the superior assumption, so when mutually exclusive projects are evaluated the NPV or IRR approach should be used for the capital budgeting decision.

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%. 3 Project A Project B -1,050 -1,050 600 200 300 450 290 740 2 95