Prestwood Products Company's cost of capital is 11.2% and the company is considering two mutually exclusive projects. In the past, it usually takes about 5 years for the company to recoup its investments from a good project. The projects' expected cash flows are as follows: Based on IRR, which project(s) should we choose?
Prestwood Products Company's cost of capital is 11.2% and the company is considering two mutually exclusive projects. In the past, it usually takes about 5 years for the company to recoup its investments from a good project. The projects' expected cash flows are as follows: Based on IRR, which project(s) should we choose?
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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Question
Prestwood Products Company's cost of capital is 11.2% and the company is considering two mutually exclusive projects. In the past, it usually takes about 5 years for the company to recoup its investments from a good project. The projects' expected cash flows are as follows:
Based on IRR, which project(s) should we choose?
Transcribed Image Text:Year Project A Project B
($300)
(387)
(193)
($405)
1
134
2
134
3
100
234
4
600
134
5
600
134
6
650
134
7
50
Expert Solution
Step 1
Internal rate of return: It refers to the annual rate of return where the NPV ( net present value ) of the project is zero. But IRR doesn't give the project's actual value in the dollar. It is used by companies to compare different project rates and choose profitable projects.
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