Bausch company is presented with the following two mutually exclusive projects. The required return for both projects is 16 %. Year Project M -$ 136,000 63,900 81,900 72,900 Project N -$359,000 150,500 184,000 135,500 1 3 4 58,900 114,000 What is the IRR for each project? What is the NPV for each project? Which, if either of the projects should the company accept?
Bausch company is presented with the following two mutually exclusive projects. The required return for both projects is 16 %. Year Project M -$ 136,000 63,900 81,900 72,900 Project N -$359,000 150,500 184,000 135,500 1 3 4 58,900 114,000 What is the IRR for each project? What is the NPV for each project? Which, if either of the projects should the company accept?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:### Investment Analysis: Project M vs. Project N
Bausch Company is evaluating two mutually exclusive projects, M and N. Both projects have a required return rate of 16%. The cash flows for each project over a four-year period are detailed below:
| Year | Project M | Project N |
|------|---------------|---------------|
| 0 | -$136,000 | -$359,000 |
| 1 | $63,900 | $150,500 |
| 2 | $81,900 | $184,000 |
| 3 | $72,900 | $135,500 |
| 4 | $58,900 | $114,000 |
#### Questions:
1. What is the Internal Rate of Return (IRR) for each project?
2. What is the Net Present Value (NPV) for each project?
3. Which, if either, of the projects should the company accept?
The table outlines the initial investment and the following cash inflows for Project M and Project N over four years. Project M requires an initial outlay of $136,000, while Project N requires an initial outlay of $359,000.
The goal is to calculate the IRR and NPV for each project. These financial metrics will help Bausch Company determine the profitability and feasibility of each project under the given rate of return of 16%.
For calculating IRR and NPV, you can use financial calculators or software tools like Excel:
* **IRR (Internal Rate of Return):** The IRR is the discount rate that makes the NPV of all cash flows from a particular project equal to zero.
* **NPV (Net Present Value):** The NPV is the difference between the present value of cash inflows and the initial investment, calculated using the required rate of return.
Based on these analyses, the company can decide which project, if any, is financially viable.
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