Answer:
1. 18.09%
2. 12%
3. 20.02%
Explanation:
As the MARR is 15%, we will accept projects which have IRR more than 15%. As the projects are mutually exclusive, we will choose only one project.
An IRR (Internal Rate of Return) is the rate which makes the NPV (Net Present Value) = ZERO.
The formula to calculate IRR is: 0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n where P0 = Initial cash outflow
And P1, . . . Pn equals the cash inflows in periods 1, 2, . . . n, respectively.
1) IRR of project 1:
0 = -$20,000 + $4,465/(1+IRR)1 + $4,465/(1+IRR)2 + $4,465/(1+IRR)3 + . . . + $4,465/(1+IRR)10
Solving for IRR we have = 18.09%
2) IRR of project 2:
0 = -$10,000 + $1,770/(1+IRR)1 + $1,770/(1+IRR)2 + $1,770/(1+IRR)3 + . . . + $1,770/(1+IRR)10
Solving for IRR we have = 12%
3) IRR of project 3:
0 = -$15,000 + $3,580/(1+IRR)1 + $3,580/(1+IRR)2 + $3,580/(1+IRR)3 + . . . + $3,580/(1+IRR)10
Solving for IRR we have = 20.02%
We will choose project 3 as it has the highest IRR.
