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Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been...

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Finance

Bellinger Industries is considering two projects for inclusionin its capital budget, and you have been asked to do the analysis.Both projects' after-tax cash flows are shown on the time linebelow. Depreciation, salvage values, net operating working capitalrequirements, and tax effects are all included in these cash flows.Both projects have 4-year lives, and they have risk characteristicssimilar to the firm's average project. Bellinger's WACC is 11%.

01234
Project A-1,100590360220280
Project B-1,100230300360700

What is Project Delta's IRR? Do not round intermediatecalculations. Round your answer to two decimal places.

%

Answer & Explanation Solved by verified expert
4.0 Ratings (782 Votes)

IRR = LOWER RATE + {NPV(L) / NPV(L)- NPV(H)} * (HIGHER RATE - LOWER RATE)

Project A

Let us assume two rates be 14% and 15%

NPV @ 14%

Year Cash flows PVF @ 14% P.V.
0 -1100 1 (1,100.00)
1 590 0.87719298         517.54
2 360 0.76946753         277.01
3 220 0.67497152         148.49
4 280 0.59208028         165.78
NPV              8.83

NPV @15%

Year Cash flows PVF @ 15% P.V.
0 -1100 1 (1,100.00)
1 590 0.86956522         513.04
2 360 0.75614367         272.21
3 220 0.65751623         144.65
4 280 0.57175325         160.09
NPV         (10.00)

IRR = 14%+ {8.83 / 8.83-(-10)} (15- 14) = 14.47%

Project B

Let us assume two rte here be 13% and 14%

NPV @ 13%

Year Cash flows PVF @ 13% P.V.
0 -1100 1 (1,100.00)
1 230 0.88495575         203.54
2 300 0.78314668         234.94
3 360 0.69305016         249.50
4 700 0.61331873         429.32
NPV           17.30

NPV @14%

Year Cash flows PVF @ 14% P.V.
0 -1100 1 (1,100.00)
1 230 0.87719298         201.75
2 300 0.76946753         230.84
3 360 0.67497152         242.99
4 700 0.59208028         414.46
NPV           (9.96)

IRR = 13%+ {17.3/17.3-(-9.96)} *(14- 13) = 13.63%
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