Question

L-3 Communications is considering two mutually exclusive projects, A and B. Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. L-3 Communications required rate of return for these projects is 10%. The internal rate of return for Project B is

Answer 1

Answer:

35.27%

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:

Cash flow in year 0 = - $120,000

Cash flow in year 1 =  $64,000

Cash flow in year 2 =  $67,000

Cash flow in year 3 = $56,000

Cash flow in year 4 = $45,000

IRR = 35.27%

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 then press the compute button.

I hope my answer helps you