Question

0 Project A 125,000 30,000 330,000 120,000 Project B - 110,000 20,000 2 20,000 3 130,000 (a) Calculate the IRR for projet A (6) calculate the Fan for project Balf IRR is Erdrer If company MARR = 15%. Is the project weeeptable Why?

Answer 1

Ans. =

At IRR: Present Value of Outflows = Present Value of Inflows

Project A:

125000 = 30000/(1+r)^1 + 30000/(1+r)^2 + 120000/(1+r)^3

Now, We can find IRR by Trial and Error method.

Put IRR as 16% in this Equation and we will get Inflows Equal to Outflows.

125000 = 30000/(1.16)^1 + 30000/(1.16)^2 + 120000/(1.16)^3

125000 = 25862.1 + 22294.9 + 76878.9

125000 Outflows is approximately equal to 125000 Inflows.

So, Project A IRR is equal to 16%.

Project B:

110000 = 20000/(1+r)^1 + 20000/(1+r)^2 + 130000/(1+r)^3

Now, We can find IRR by Trial and Error method.

Put IRR as 18.2% in this Equation and we will get Inflows Equal to Outflows.

110000 = 20000/(1.182)^1 + 20000/(1.182)^2 + 130000/(1.182)^3

110000 = 16920.5 + 14315.1 + 78721.1

110000 Outflows is approximately equal to 110000 Inflows.

So, Project B IRR is equal to 18.2%

B)

If IRR is equal to 18.18% and Minimum Acceptable Rate of return is 15%. Then obviously we should Accept then Project as the Project will be Profitable.

MARR is the minimum level of Return that the firm want to earn and IRR is the return which firm actually earn then IRR is Higher than MARR it means firm is Earning more than what is Required to Cover all the Costs.

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