Consider the following two mutually exclusive projects: YearCash Flow (X)Cash Flow (Y)0−$21,000−$21,00019,1009,60029,1008,05039,1008,950YearCash Flow (X)Cash Flow (Y)0−$21,000−$21,00019,1009,60029,1008,05039,1008,950 Calculate the IRR for each project

Finance Dec 19, 2020

Consider the following two mutually exclusive projects:

YearCash Flow (X)Cash Flow (Y)0−$21,000−$21,00019,1009,60029,1008,05039,1008,950YearCash Flow (X)Cash Flow (Y)0−$21,000−$21,00019,1009,60029,1008,05039,1008,950

Calculate the IRR for each project.

Expert Solution

Recall that IRR is the discount rate that equates the net present value of a project to zero.

Let IRR for project x by R, then we have −21000+9100(1+R)+9100(1+R)2+9100(1+R)3=0,−21000+9100(1+R)+9100(1+R)2+9100(1+R)3=0,, which yields R = 14.36%.

Let IRR for project Y by i, then we have −21000+9600(1+i)+8050(1+i)2+8950(1+i)3=0,−21000+9600(1+i)+8050(1+i)2+8950(1+i)3=0,, which yields i = 13.01%.

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