OLA #11.2 Due to a restricted budget, a company can only undertake one of the following projects: Project X: This project has an initial investment of $850,000 and annual profits of $400,000 in year 1, $400,000 in year 2 and $325,000 in year 3. Project Y: This project has an initial investment of $850,000 and a profit of $1,050,000 in year 3. a. Calculate the IRR for Project X. b. Calculate the IRR for Project Y. c. Which project should the company undertake? Kindly add all the decimals DO NOT ROUND

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
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OLA #11.2

Due to a restricted budget, a company can only undertake one of the following projects:

Project X: This project has an initial investment of $850,000 and annual profits of $400,000 in year 1, $400,000 in year 2 and $325,000 in year 3.

Project Y: This project has an initial investment of $850,000 and a profit of $1,050,000 in year 3.

a. Calculate the IRR for Project X.

b. Calculate the IRR for Project Y.

c. Which project should the company undertake?

Kindly add all the decimals DO NOT ROUND

Expert Solution
Step 1

The IRR is an annualized measure of return the investment is expected to generate every year. At this rate, the NPV is 0.

Step 2

The IRR is calculated as:

Finance homework question answer, step 2, image 1

Workings:

Finance homework question answer, step 2, image 2

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