Question

Romboski, LLC, has identified the following two mutually exclusive projects:

Year Cash Flow (A) Cash Flow (B)
0 $ 57,000 $ 57,000
1 33,000 20,300
2 27,000 24,300
3 19,500 29,000
4 13,400 25,300


a. Over what range of discount rates would you choose Project A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b. Over what range of discount rates would you choose Project B? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c. At what discount rate would you be indifferent between these two projects? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

a. We choose Project A if discount rate is above 27.46%

b. We choose Project A if discount rate is between 25% and 27.46%

c. There would you be indifferent between these two projects if discount rate is below 25%

Explanation:

We can use excel to find the internal rate of return (IRR) as file attached

IRR of project A is 27.46%

IRR of project B is 25.00%