Question

There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,265 and is expected to generate the following cash flows: First Year Second Year Third Year Total Alpha Project $32,000 $22,500 $4,500 $59,000 Beta Project 8,000 23,000 27,627 58,627 A. Calculate the internal rate of return on both projects. Use the IRR spreadsheet function to calculate internal rate of return. Alpha Project fill in the blank 1 68.275 % Beta Project fill in the blank 2 % B. Make a recommendation on which one to accept.

Answer 1

Answer:

Alpha = 42%

25%

I would accept the alpha project because it has the higher IRR

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  

Alpha

Cash flow in year 0 = $-35,265

Cash flow in year 1 = $32,000

Cash flow in year 2 = $22,500

Cash flow in year 3 =  $4,500

IRR = 42%

Beta

Cash flow in year 0 = $-35,265

Cash flow in year 1 =8,000

Cash flow in year 2 =23,000

Cash flow in year 3 =27,627

IRR = 25%

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.