E26-25 Using IRR to make capital investment decisions

Refer to the data regarding Juda Products in Exercise E26-24. Compute the IRR of

each project, and use this information to identify the better investment. Attached is the worksheet to E26-24, and a reference template for E26-25

E26-24 Requirements 1. What is the NPV of each project? Assume neither project has a residual value. two decimal acceptable places. 2. Round What istothe maximum price to pay for each project? 3. What is the profitability index of each project? Round to two decimal places. Solution: Requirement 1 Time Net Annuity Present Cash PV Factor Value (i = (i = Inflow 14%, 12%, Project A n = 7) n = 10) $57,00 1-7 Present value annuity 0 x 4.288 $244,416 0 Initial investment -290,000 Net present value $45,584 Project B 1-10 Present value annuity Initial investment Net present value $70,00 0 x Requirement 2 The maximum acceptable price to pa is $244,416 for Project A and $395,500 for Project B. Requirement 3 Profitability Index = Present value of net cash inflows Initial investment 5.65 $395,500 -395,000 $500 0.84 = $244,416 $290,000 Project A 1.00 = $395,500 $395,000 Project B E26-25 Compute the IRR of each project and use this information to identify the better investment. Solution: Project A: Annuity PV Factor (i = 14%,n = 7) (i = 14%,n = 7) Project B: Annuity PV Factor (i = 12%,n = 10) (i = 12%,n = 10)