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
Related questions
Question
100%
Question and chart incuded in screenshot
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:
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
Step by step
Solved in 2 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education