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Calculate the IRR for each of the projects.

Calculate the IRR for each of the projects.

Essentials Of Investments
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
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### IRR—Mutually Exclusive Projects **Overview:** Bell Manufacturing is evaluating two mutually exclusive projects to enhance its warehouse capacity. The firm's cost of capital is 14%. The table below provides the cash flows for each project. **Objectives:** a. Calculate the Internal Rate of Return (IRR) for each project and assess their acceptability based on IRR. b. Determine the preferred project. #### a. Calculating IRR 1. **Project X:** - The internal rate of return (IRR) of project X is _____%. Please round to two decimal places. **Question:** Is project X acceptable based on IRR? - Yes - No 2. **Project Y:** - The internal rate of return (IRR) of project Y is _____%. Please round to two decimal places. **Question:** Is project Y acceptable based on IRR? - Yes - No #### b. Project Preference **Question:** Which project is preferred? - Select the most suitable answer based on calculations. --- ### Detailed Description of Data Table: #### Initial Investment - **Project X:** $500,000 - **Project Y:** $310,000 #### Cash Inflows (CF\(_t\)) - **Year 1:** - Project X: $100,000 - Project Y: $120,000 - **Year 2:** - Project X: $150,000 - Project Y: $140,000 - **Year 3:** - Project X: $130,000 - Project Y: $95,000 - **Year 4:** - Project X: $210,000 - Project Y: $70,000 - **Year 5:** - Project X: $250,000 - Project Y: $40,000 This data table is clickable and can be imported into a spreadsheet for further analysis.
Transcribed Image Text:### IRR—Mutually Exclusive Projects **Overview:** Bell Manufacturing is evaluating two mutually exclusive projects to enhance its warehouse capacity. The firm's cost of capital is 14%. The table below provides the cash flows for each project. **Objectives:** a. Calculate the Internal Rate of Return (IRR) for each project and assess their acceptability based on IRR. b. Determine the preferred project. #### a. Calculating IRR 1. **Project X:** - The internal rate of return (IRR) of project X is _____%. Please round to two decimal places. **Question:** Is project X acceptable based on IRR? - Yes - No 2. **Project Y:** - The internal rate of return (IRR) of project Y is _____%. Please round to two decimal places. **Question:** Is project Y acceptable based on IRR? - Yes - No #### b. Project Preference **Question:** Which project is preferred? - Select the most suitable answer based on calculations. --- ### Detailed Description of Data Table: #### Initial Investment - **Project X:** $500,000 - **Project Y:** $310,000 #### Cash Inflows (CF\(_t\)) - **Year 1:** - Project X: $100,000 - Project Y: $120,000 - **Year 2:** - Project X: $150,000 - Project Y: $140,000 - **Year 3:** - Project X: $130,000 - Project Y: $95,000 - **Year 4:** - Project X: $210,000 - Project Y: $70,000 - **Year 5:** - Project X: $250,000 - Project Y: $40,000 This data table is clickable and can be imported into a spreadsheet for further analysis.
Expert Solution
Step 1

IRR is a tool for making investment decisions. It measures whether an investment is profitable or not. It is the annual rate of return that investment is likely to generate. While computing IRR, the Net Present Value (NPV) of the project is assumed to be zero.

It is computed as:

NPV = 0 = ∑n=1nCn1+IRRn-Ci

Where n denotes the time period

C denotes the cash inflows

IRR is the Internal Rate of Return

Ci is the initial investment or cash outflows

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