**Answer:**

IRR = 8.77%

**Explanation:**

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 with a financial calculator

Incremental IRR can be determined by subtracting the cash flows of the project with the smaller cost from the cash flows of the project with the higher initial cost

Incremental cash flows

Cash flow in year 0 = 639,700 - 411,200 = -228,500

Cash flow in year 1 = 288,000 - 186,000 = 102,000

Cash flow in year 2 = 319,000 - 178,000 = 141,000

Cash flow in year 3 = 165,000 - 145,000 = 20,000

IRR = 8.77%

To find the IRR using a financial calculator:

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.

3. Press compute