Question
Big Company is evaluating two projects, Project A and Project B. Both projects are of equal risk. Big Company has a WACC of 11%. The
Big Company is evaluating two projects, Project A and Project B. Both projects are of equal risk. Big Company has a WACC of 11%. The expected Free Cash Flows of the projects are as follows:
Period | Annual Cash Flows Project A | Annual Cash Flows Project B | |
0 | ($10,000) | ($10,000) | |
1 | 2,000 | 5,500 | |
2 | 3,000 | 3,500 | |
3 | 4,000 | 3,000 | |
4 | 5,000 | 500 |
Compute the Internal Rate of Return (IRR) for "A". Show your inputs/work for partial credit.
The Internal Rate of Return of Project B is 12.96%. If Projects A and B are independent, considering only at the IRR method, which project(s) should Big Company proceed with? Explain your answer.
The Internal Rate of Return of Project B is 12.96%. If Projects A and B are mutually exclusive, considering only at the IRR method, which project(s) should Big Company proceed with? Explain your answer.
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