Answer:
Both projects should be rejected
Explanation:
The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.
IRR can be calculated using a financial calculator:
For project A,
Cash flow in year zero = $75,000
Cash flow in year one = $18,500
Cash flow in year two = $42,900
Cash flow in year three = $28,600
IRR = 9.12%
For project B,
Cash flow in year zero = $-72,000
Cash flow in year one = $22,000
Cash flow in year two = $38,000
Cash flow in year three = $26,500
IRR = 9.48%
The decision rule on if to invest or not is if IRR > r
For both investments IRR is less than rate of return
9.12% < 10.50%
9.48% < 10.50%
To find the IRR using a financial calacutor:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. After inputting all the cash flows, press the IRR button, and the compute button.
I hope my answer helps you
