Question
IRRlong dashMutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant
IRRlong dashMutually
exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table:
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. The firm's cost of capital is
1313 %.
a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs.
b. Which project is preferred?
Project X | Project Y |
| |||
Initial investment (CF 0CF0) | $500 comma 000500,000 | $320 comma 000320,000 | |||
Year (t) | Cash inflows (CF Subscript tCFt) | ||||
1 | $120 comma 000120,000 | $130 comma 000130,000 | |||
2 | $120 comma 000120,000 | $120 comma 000120,000 | |||
3 | $150 comma 000150,000 | $95 comma 00095,000 | |||
4 | $190 comma 000190,000 | $90 comma 00090,000 | |||
5 | $230 comma 000230,000 | $60 comma 00060,000 |
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