Question

Kenner Company is considering two projects.

Project A Project B

Initial investment $85,000 $24,000

Annual Cash Flows $20,676 $6,011

Life of the Project 6 years 5 years

Depreciation per year $14,167 $4,800

Present value of an Annuity of $1 in Arrears

Periods 8% 10% 12 % 14 %

1 0.926 0.909 0.893 0.877

2 1.783 1.736 1.690 1.647

3 2.577 .487 2.402 .322

4 3.312 3.170 3.037 .914

5 3.993 3.791 3.605 14.433

6 4.623 14.355 4.111 3.889

7 5.206 14.868 4.564 14.288

8 5.747 5.335 4.968 4.639

9 6.247 5.759 5.328 4.946

10 6.710 6.145 5.650 5.216

Required:

a. Which of the two projects, A or B, is better in terms of internal rate of return?

Answer 1

Answer:

Project A is better

Explanation:

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

IRR can be calculated using a financial calculator

For project A ,

Cash flow in year 0 = $-85,000

Cash flow each year from year 1 to 6 = $20,676

IRR = 12%

For project B ,

Cash flow in year 0 = $-24,000

Cash flow each year from year 1 to 5= $6,011 

IRR = 8%

Because project A has the higher IRR, it is better than project B.

To find the IRR using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.

I hope my answer helps you