Question

Following is information on two alternative investments being considered by Jolee Company. The company requires a 12% return from its investments. Project A Project B Initial investment $ (170,000 ) $ (115,000 ) Expected net cash flows in: Year 1 42,500 34,500 Year 2 58,500 52,500 Year 3 82,795 68,500 Year 4 92,900 68,500 Year 5 67,500 68,500 Compute the internal rate of return for each of the projects using excel functions. (Round your answers to 2 decimal places.)

Answer 1

Answer:

                                             Project A                  Project B

Initial investments               ($170,000)               ($115,000)

CF Year 1                              $42,500                  $34,500

CF Year 2                             $58,500                  $52,500

CF Year 3                             $82,795                  $68,500

CF Year 4                             $92,900                  $68,500

CF Year 5                             $67,500                  $68,500

using an excel spreadsheet and the IRR function, the internal rate of return of each project is:

• Project A's IRR = 26.02%
• Project B's IRR = 36.31%

We can use the discount rate (12%) to calculate the projects' NPV, we do not need it to calculate their IRR:

• Project A's NPV = $70,855
• Project B's NPV = $88,815